**Table of Contents**

** **

 

** **

**UNITED STATES**

**SECURITIESAND 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** | ** ** |
|-------|---------------------------------------------------------------------------------------------------------|------------|

 

##### **Forthe quarterly period ended December 28, 2008**

 

**or**

** **
| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** | ** ** |
|-------|----------------------------------------------------------------------------------------------------------|------------|

 

**For the transition period from             to            **

 

**CommissionFile Number: 0-24746**

# *** ***

# ***TESSCO TECHNOLOGIES INCORPORATED***

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                     | ** ** | **52-0729657**                       |
|------------------------------------------------------------------|------------|--------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S Employer  Identification No.) |
| ** **                                                       | ** ** | ** **                           |
| **11126  McCormick Road, Hunt Valley, Maryland**                 | ** ** | **21031**                            |
| (Address of  principal executive offices)                        |       | (Zip Code)                           |

 

**(410)229-1000**

(Registrant’stelephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

Yes  x     No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  Large acceleratedfiler o  Accelerated filer  o   Non-accelerated filer oSmaller reporting company x

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

Yes  o   No  x

 

Thenumber of shares of the registrant’s Common Stock, $0.01 par value per share,outstanding as of January 30, 2009, was 4,688,831.

 

 

 

----

Table of Contents

 

**TESSCO TECHNOLOGIES INCORPORATED**

**Index to Form 10-Q**

 
| **Part I**  | **FINANCIAL INFORMATION** | 3                                                                                            |
|------------------|---------------------------|----------------------------------------------------------------------------------------------|
|             |                      |                                                                                         |   |
|             | Item 1.                   | Financial Statements.                                                                        | 3 |
|             |                      |                                                                                         |   |
|             | Item 2.                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations. | 15 |
|             |                      |                                                                                         |   |
|             | Item 3.                   | Quantitative  and Qualitative Disclosures About Market Risk.                                 | 25 |
|             |                      |                                                                                         |   |
|             | Item 4.                   | Controls and  Procedures.                                                                    | 25 |
|             |                      |                                                                                         |   |
| **Part II** | **OTHER INFORMATION**     | 26                                                                                           |
|             |                      |                                                                                         |   |
|             | Item 1.                   | Legal Proceedings.                                                                           | 26 |
|             |                      |                                                                                         |   |
|             | Item 1A.                  | Risk Factors.                                                                                | 26 |
|             |                      |                                                                                         |   |
|             | Item 2.                   | Unregistered  Sales of Equity Securities and Use of Proceeds.                                | 26 |
|             |                      |                                                                                         |   |
|             | Item 3.                   | Defaults Upon  Senior Securities.                                                            | 27 |
|             |                      |                                                                                         |   |
|             | Item 4.                   | Submission of  Matters to a Vote of Security Holders.                                        | 27 |
|             |                      |                                                                                         |   |
|             | Item 5.                   | Other Information.                                                                           | 27 |
|             |                      |                                                                                         |   |
|             | Item 6.                   | Exhibits.                                                                                    | 27 |
|             |                      |                                                                                         |   |
|             | Signatures                |                                                                                         | 28 |

 

2

----

###### **Table ofContents**

 

###### **PART I.  FINANCIAL INFORMATION**

###### ** **

###### **Item 1. Financial Statements.**

 

**TESSCOTECHNOLOGIES INCORPORATED**

**ConsolidatedBalance Sheets**

 
| ** **                                       | ** ** | **December 28,  2008** | ** **  | **March 30,****2008** | ** ** |
|--------------------------------------------------|------------|-----------------------------|-------------|----------------------------|------------|
| ** **                                       | ** ** | **(unaudited)**             | ** **  | ** **                 | ** ** |
| **ASSETS**                                       |       |                        |        |                       |       |
|                                             |       |                        |        |                       |       |
| Current assets:                                  |       |                        |        |                       |       |
| Cash and cash equivalents                        |       | $                           | 1,433,200   |                       | $          | 2,086,200 |   |
| Trade accounts receivable, net                   |       | 44,823,500                  |        | 55,698,600                 |       |
| Product inventory, net                           |       | 51,663,100                  |        | 49,057,300                 |       |
| Deferred tax assets                              |       | 4,048,800                   |        | 4,048,800                  |       |
| Prepaid expenses and other current assets        |       | 3,361,600                   |        | 1,827,500                  |       |
| Total current assets                             |       | 105,330,200                 |        | 112,718,400                |       |
|                                             |       |                        |        |                       |       |
| Property and equipment, net                      |       | 21,662,200                  |        | 22,233,600                 |       |
| Goodwill, net                                    |       | 6,550,700                   |        | 6,310,100                  |       |
| Other long-term assets                           |       | 2,252,500                   |        | 2,536,500                  |       |
| Total assets                                     |       | $                           | 135,795,600 |                       | $          | 143,798,600 |   |
|                                             |       |                        |        |                       |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |                        |        |                       |       |
| ** **                                       |       |                        |        |                       |       |
| Current liabilities:                             |       |                        |        |                       |       |
| Trade accounts payable                           |       | $                           | 51,515,600  |                       | $          | 64,433,400 |   |
| Payroll, benefits and taxes                      |       | 6,460,400                   |        | 3,014,400                  |       |
| Income and sales tax liabilities                 |       | 3,666,800                   |        | 3,588,700                  |       |
| Accrued expenses and other current liabilities   |       | 1,343,000                   |        | 1,253,600                  |       |
| Revolving line of credit                         |       | 6,182,600                   |        | 3,353,500                  |       |
| Current portion of long-term debt                |       | 361,400                     |        | 360,400                    |       |
| Total current liabilities                        |       | 69,529,800                  |        | 76,004,000                 |       |
|                                             |       |                        |        |                       |       |
| Deferred tax liabilities                         |       | 2,189,300                   |        | 2,189,300                  |       |
| Long-term debt, net of current portion           |       | 3,572,100                   |        | 3,842,600                  |       |
| Other long-term liabilities                      |       | 1,471,700                   |        | 1,611,100                  |       |
| Total liabilities                                |       | 76,762,900                  |        | 83,647,000                 |       |
|                                             |       |                        |        |                       |       |
| Shareholders’ equity:                       |       |                        |        |                       |       |
| Preferred stock                                  |       | —                      |        | —                     |       |
| Common stock                                     |       | 79,700                      |        | 78,200                     |       |
| Additional paid-in capital                       |       | 33,885,400                  |        | 32,087,400                 |       |
| Treasury stock                                   |       | (41,873,900                 | )           | (33,454,300                | )          |
| Retained earnings                                |       | 67,095,700                  |        | 61,552,900                 |       |
| Accumulated other comprehensive loss, net of tax |       | (154,200                    | )           | (112,600                   | )          |
| Total shareholders’ equity                  |       | 59,032,700                  |        | 60,151,600                 |       |
| Total liabilities and shareholders’ equity  |       | $                           | 135,795,600 |                       | $          | 143,798,600 |   |

 

See accompanying notes.

 

3

----

Table of Contents

 

**TESSCO TECHNOLOGIES INCORPORATED**

**Consolidated Statements of Income**

 
| ** **                                   | ** ** | **Fiscal Quarters Ended** | ** **  | **Nine Months Ended** | ** ** |
|----------------------------------------------|------------|-------------------------------------|-------------|---------------------------------|------------|
| ** **                                   | ** ** | **December 28,****2008**       | ** **  | **December 30,****2007**   | ** ** | **December 28,****2008** | ** ** | **December 30,****2007** | ** ** |
| ** **                                   | ** ** | **(unaudited)**                     | ** **  | **(unaudited)**                 | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
|                                         |       |                                |        |                            |       |   |   |   |   |
| Revenues                                     |       | $                                   | 118,943,300 |                            | $          | 135,732,000 |   | $ | 384,785,300 |   | $ | 392,680,400 |   |
| Cost of goods sold                           |       | 89,675,900                          |        | 105,329,600                     |       | 290,284,400 |   | 305,436,400 |   |
|                                         |       |                                |        |                            |       |   |   |   |   |
| Gross profit                                 |       | 29,267,400                          |        | 30,402,400                      |       | 94,500,900 |   | 87,244,000 |   |
|                                         |       |                                |        |                            |       |   |   |   |   |
| Selling, general and administrative expenses |       | 26,868,200                          |        | 27,729,000                      |       | 84,660,800 |   | 81,737,800 |   |
|                                         |       |                                |        |                            |       |   |   |   |   |
| Income from operations                       |       | 2,399,200                           |        | 2,673,400                       |       | 9,840,100 |   | 5,506,200 |   |
|                                         |       |                                |        |                            |       |   |   |   |   |
| Interest expense, net                        |       | 213,700                             |        | 161,000                         |       | 516,400 |   | 337,800 |   |
|                                         |       |                                |        |                            |       |   |   |   |   |
| Income before provision for  income  taxes   |       | 2,185,500                           |        | 2,512,400                       |       | 9,323,700 |   | 5,168,400 |   |
|                                         |       |                                |        |                            |       |   |   |   |   |
| Provision for income taxes                   |       | 944,100                             |        | 978,100                         |       | 3,780,900 |   | 2,051,700 |   |
|                                         |       |                                |        |                            |       |   |   |   |   |
| Net income                                   |       | $                                   | 1,241,400   |                            | $          | 1,534,300 |   | $ | 5,542,800 |   | $ | 3,116,700 |   |
|                                         |       |                                |        |                            |       |   |   |   |   |
| Basic earnings per share                     |       | $                                   | 0.26        |                            | $          | 0.30 |   | $ | 1.12 |   | $ | 0.59 |   |
|                                         |       |                                |        |                            |       |   |   |   |   |
| Diluted earnings per share                   |       | $                                   | 0.25        |                            | $          | 0.29 |   | $ | 1.09 |   | $ | 0.56 |   |
|                                         |       |                                |        |                            |       |   |   |   |   |
| Basic weighted average shares outstanding    |       | 4,743,300                           |        | 5,151,800                       |       | 4,944,800 |   | 5,299,400 |   |
|                                         |       |                                |        |                            |       |   |   |   |   |
| Diluted weighted average shares outstanding  |       | 4,871,900                           |        | 5,374,400                       |       | 5,085,100 |   | 5,535,800 |   |

 

See accompanying notes.

 

4

----

Table of Contents

 

**TESSCOTECHNOLOGIES INCORPORATED**

**Consolidated Statements of Cash Flows**

 
| ** **                                                                                               | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                               | ** ** | **December 28,  2008**     | ** ** | **December 30,  2007** | ** ** |
| ** **                                                                                               | ** ** | **(unaudited)**                 | ** ** | **(unaudited)** | ** ** |
| Cash flows from operating activities:                                                                    |       |                            |       |   |   |
| Net income                                                                                               |       | $                               | 5,542,800  |   | $ | 3,116,700 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:                       |       |                            |       |   |   |
| Depreciation and amortization                                                                            |       | 3,164,900                       |       | 3,637,400 |   |
| Gain on sale of property and equipment                                                                   |       | (157,600                        | )          | — |   |
| Non-cash stock compensation expense                                                                      |       | 1,350,500                       |       | 1,514,400 |   |
| Deferred income taxes and other                                                                          |       | (61,800                         | )          | 68,700 |   |
| Change in trade accounts receivable                                                                      |       | 10,875,100                      |       | (7,085,200 | ) |
| Change in product inventory                                                                              |       | (2,605,800                      | )          | (17,021,700 | ) |
| Change in prepaid expenses and other current assets                                                      |       | (755,800                        | )          | (302,200 | ) |
| Change in trade accounts payable                                                                         |       | (11,849,400                     | )          | 19,982,700 |   |
| Change in payroll, benefits and taxes                                                                    |       | 3,446,000                       |       | (3,199,500 | ) |
| Change in income and sales tax liabilities                                                               |       | (700,200                        | )          | (353,600 | ) |
| Change in accrued expenses and other current liabilities                                                 |       | 291,800                         |       | 115,100 |   |
| Net cash provided by operating activities                                                                |       | 8,540,500                       |       | 472,800 |   |
|                                                                                                     |       |                            |       |   |   |
| Cash flows from investing activities:                                                                    |       |                            |       |   |   |
| Purchases of property and equipment                                                                      |       | (2,491,100                      | )          | (2,282,900 | ) |
| Proceeds from sale of property and equipment                                                             |       | 220,000                         |       | — |   |
| Acquisition of business in purchase transaction and additional  earn-out payments on acquired businesses |       | (1,309,000                      | )          | (2,330,000 | ) |
| Net cash used in investing activities                                                                    |       | (3,580,100                      | )          | (4,612,900 | ) |
|                                                                                                     |       |                            |       |   |   |
| Cash flows from financing activities:                                                                    |       |                            |       |   |   |
| Net borrowings on revolving line of credit                                                               |       | 2,829,100                       |       | 6,059,000 |   |
| Payments on long-term debt                                                                               |       | (269,500                        | )          | (266,800 | ) |
| Proceeds from issuance of stock                                                                          |       | 58,700                          |       | 563,900 |   |
| Purchases of treasury stock                                                                              |       | (8,419,600                      | )          | (6,238,100 | ) |
| Excess tax benefit from stock-based compensation                                                         |       | 187,900                         |       | 1,134,000 |   |
| Net cash (used in) provided by financing activities                                                      |       | (5,613,400                      | )          | 1,252,000 |   |
|                                                                                                     |       |                            |       |   |   |
| Net decrease in cash and cash equivalents                                                                |       | (653,000                        | )          | (2,888,100 | ) |
|                                                                                                     |       |                            |       |   |   |
| Cash and cash equivalents, beginning of period                                                           |       | 2,086,200                       |       | 4,176,300 |   |
|                                                                                                     |       |                            |       |   |   |
| Cash and cash equivalents, end of period                                                                 |       | $                               | 1,433,200  |   | $ | 1,288,200 |   |

 

Seeaccompanying notes.

 

5

----

Tableof Contents

 

**TESSCO TECHNOLOGIES INCORPORATED**

**Notes to Consolidated FinancialStatements**

**December 28, 2008**

(Unaudited)

 

# ***Note 1. Description of Business and Basis of Presentation***

# * *

TESSCOTechnologies Incorporated, a Delaware corporation (TESSCO or the Company), is aleading provider of integrated product and supply chain solutions to theprofessionals that design, build, run, maintain and use wireless, mobile, fixedand in-building systems. The Company provides marketing and sales services,knowledge and supply chain management, product-solution delivery and controlsystems utilizing extensive Internet and information technology.  Approximately 95% of the Company’s sales aremade to customers in the United States. The Company takes orders in several ways, including phone, fax, onlineand through electronic data interchange.

 

In management’s opinion, the accompanying interimfinancial statements of the Company include all adjustments, consisting only ofnormal, recurring adjustments, necessary for a fair presentation of the Company’sfinancial position for the interim periods presented.  These statements are presented in accordancewith the rules and regulations of the United States Securities andExchange Commission (“SEC”).  Certaininformation and footnote disclosures normally included in the Company’s annualfinancial statements have been omitted from these statements, as permittedunder the applicable rules and regulations.  The results of operations presented in theaccompanying interim financial statements are not necessarily representative ofoperations for an entire year.  Theinformation included in this Form 10-Q should be read in conjunction withthe financial statements and notes thereto included in the Company’s AnnualReport on Form 10-K for the fiscal year ended March 30, 2008.

 

# ***Note 2. Recently Issued Accounting Pronouncements***

# * *

In September 2006, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 157, “Fair Value Measurements,” which provides guidance for using fairvalue to measure assets and liabilities. The standard also responds to investors’ requests for expandedinformation about the extent to which companies measure assets and liabilitiesat fair value, the information used to measure fair value, and the effect offair value measurements on earnings.  Thestandard applies whenever other standards require (or permit) assets orliabilities to be measured at fair value. The standard does not expand the use of fair value in any newcircumstances.  In February 2008,the FASB partially deferred the effective date of SFAS No. 157 for certainnon-financial assets and liabilities that are recognized or disclosed at fairvalue in the financial statements on a nonrecurring basis until fiscal yearsbeginning after November 15, 2008 or in the Company’s case, the fiscalyear beginning March 30, 2009.  TheCompany adopted SFAS No. 157 for its financial assets and liabilitieseffective as of March 31, 2008, and has elected to defer its adoption fornon-financial assets and liabilities until fiscal year 2010.  The adoption of SFAS No. 157 did nothave a material impact on the Company’s consolidated financial statements (seeNote 4).

 

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities —Including an Amendment of FASB Statement No. 115.”  SFAS No. 159 permits an entity tomeasure many financial instruments and certain other items at fair value thatare not currently required to be measured at fair value.  Entities that elect the fair value optionwill report unrealized gains and losses in earnings at each subsequentreporting date.  SFAS No. 159 iseffective for fiscal years beginning after November 15, 2007.  The Company adopted SFAS No. 159effective as of March 31, 2008.  Asthe Company did not elect to apply the fair value option as described underSFAS No. 159 to any of its financial assets or liabilities which were notcurrently required to be measured at fair value, the adoption of SFAS No. 159did not have an impact on the Company’s financial statements.

 

In December 2007, the FASB issued SFAS No. 141(R),“Business Combinations,” which replaces SFAS No. 141.  The standard retains the fundamentalrequirements of SFAS No. 141 that the acquisition method of accounting(labeled the purchase method under SFAS No. 141) be used for all businesscombinations and that an acquirer be identified for each businesscombination.  SFAS No. 141(R) requiresthe assets, liabilities, noncontrolling interests, certain acquiredcontingencies and contingent consideration acquired during a businesscombination to be measured at their fair value as of the acquisition date.  SFAS No. 141(R) is effective forfiscal years beginning on or after December 15, 2008.  The Company will adopt SFAS No. 141(R) onMarch 30, 2009.

 

6

----

Table ofContents

 

In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities — an amendmentof FASB Statement No. 133.”  UnderSFAS No. 161, entities are required to provide enhanced disclosures about (a) howand why an entity uses derivative instruments, (b) how derivativeinstruments and related hedged items are accounted for under FASB Statement No. 133and its related interpretations, and (c) how derivative instruments andrelated hedged items affect an entity’s financial position, financialperformance and cash flows.  Theprovisions of this statement are effective for periods beginning after November 15,2008, and both early application and comparative disclosures areencouraged.  The Company is currentlyreviewing SFAS No. 161 to determine the impact of adoption on itsfinancial statements.

 

In May 2008, the FASB issued SFAS No. 162,“The Hierarchy of Generally Accepted Accounting Principles.”  This standard identifies the sources ofaccounting principles and the framework for selecting the principles to be usedin the preparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles.  SFAS No. 162 directs the hierarchy tothe entity, rather than the auditors, as the entity is responsible forselecting accounting principles for financial statements that are presented inconformity with generally accepted accounting principles.  SFAS No. 162 is effective 60 daysfollowing the SEC’s September 16, 2008 approval of the Public CompanyAccounting Oversight Board (PCAOB) amendments to remove the hierarchy foraccounting principles generally accepted in the United States from the PCAOB’sauditing standards.  The Company does notexpect SFAS No. 162 to have an impact on its financial statements.

 

In June 2008, the FASB issued FASB StaffPosition No. 03-6-1, “Determining Whether Instruments Granted inShare-Based Payment Transactions Are Participating Securities (FSP No.03-6-1).”  FSP No. 03-6-1 requires companies totreat unvested share-based payment awards that have non-forfeitable rights todividend or dividend equivalents as participating securities.  Therefore, these financial instruments mustbe included in calculating basic and diluted earnings per share under thetwo-class method described in SFAS No. 128, “Earnings Per Share.”  All prior period EPS data presented should beadjusted retrospectively upon adoption. FSP No. 03-6-1 will be effective for fiscal years beginning after December 15,2008.  Therefore, the Company is requiredto adopt FSP No. 03-6-1 on March 30, 2009.  The Company currently has share based awardsfor 120,000 shares of its common stock that fall under the requirements of FSP No. 03-6-1.Although the adoption of FSP No. 03-6-1 will reduce our earnings pershare, the Company does not expect the adoption to have a material impact onits basic and diluted earnings per share calculations as currently presented.

 

# ***Note 3. Stock Compensation***

# * *

TheCompany’s selling, general and administrative expenses for the fiscal quarterand nine months ended December 28, 2008 includes $268,600 and $1,350,500,respectively, of non cash stock compensation expense.  The Company’s selling, general andadministrative expenses for the fiscal quarter and nine months ended December 30,2007 includes $434,800 and $1,514,400, respectively, of non cash stockcompensation expense.  Stock compensationexpense is primarily related to our Performance Stock Unit (PSU) Program.  In addition, the Company recorded an excesstax benefit directly to shareholders’ equity of $187,900 and $1,134,000,primarily related to the PSUs which vested during the nine months ended December 28,2008 and December 30, 2007, respectively.

 

**PerformanceStock Units: **The following table summarizes the activityunder the Company’s PSU program for the first nine months of fiscal year 2009:

 
| ** **                                                                         | ** ** | **Nine Months Ended  December 28, 2008** | ** ** | **Weighted Average  Fair Value at Grant  Date** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| Shares available  for issue under outstanding PSUs, non-vested beginning of period |       | 439,031                                                      |       | $                                                                   | 16.79      |   |
| Granted                                                                            |       | 275,000                                                      |       | 11.71                                                               |       |
| Vested                                                                             |       | (147,593                                                     | )          | 10.42                                                               |       |
| Forfeited/cancelled                                                                |       | (188,020                                                     | )          | 23.95                                                               |       |
| Shares available  for issue under outstanding PSUs, non-vested end of period       |       | 378,418                                                      |       | $                                                                   | 12.03      |   |

 

7

----

Table ofContents

 

Of the 378,418 shares availablefor issuance under outstanding PSUs but not yet vested as of December 28, 2008,103,418 shares have been earned, and assuming the respective participantsremain employed by or associated with the Company on these dates, half of theseshares will vest and be issued on or about May 1 of each of 2009 and 2010.

 

The vast majority of the PSUs cancelledduring fiscal year 2009 related to the fiscal year 2008 grant of PSUs which hada 1-year measurement period (fiscal year 2008).  During that period,actual earnings per share did not reach the threshold level, and thus, thosePSUs were cancelled.  Per the provisions of the Second Amended andRestated 1994 Stock and Incentive Plan (the “1994 Plan”), the shares related tothese PSUs were added back to the 1994 Plan and became available for futureissuance.

 

Duringfiscal year 2009, the Compensation Committee of the Board of Directors, withthe concurrence of the full Board of Directors, granted additional PSUs toselect key individuals and directors, providing them with the opportunity toearn up to 275,000 additional shares of the Company’s common stock in theaggregate, depending upon whether certain threshold or goal earnings per sharetargets are met, subject to individual performance for employees (independentdirectors are not subject to individual performance factors).  These PSUs have only one measurement year(fiscal year 2009), with any shares earned at the end of fiscal year 2009 tovest and be issued 25% on or about May 1 of each of 2009, 2010, 2011 and2012, provided that the respective participants remain employed by or associatedwith the Company on each such date.

 

Ifthe maximum target of PSUs outstanding is assumed to be earned, totalunrecognized compensation costs would be approximately $2.4 million as of December 28,2008 and would be expensed through fiscal year 2012.

 

**Stock Options:**  Inaccordance with SFAS No. 123R, the fair value of the Company’s stockoptions have been determined using the Black-Scholes-Merton option pricingmodel, based upon facts and assumptions existing at the date of grant.  Stock options granted have exercise pricesequal to the market price of the Company’s common stock on the grant date.

 

Thevalue of each option at the date of grant is amortized as compensation expenseover the option service period.  Thisoccurs without regard to subsequent changes in stock price, volatility orinterest rates over time, provided that the option remains outstanding.  As of December 28, 2008, all outstandingstock options are fully vested. The following table summarizes the pertinentoption information for outstanding options for the nine months ended December 28,2008:

 
| ** **                                  | ** ** | **Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|---------------------------------------------|------------|------------|------------|------------------------------------------------|------------|
| Outstanding,  beginning of period           |       | 135,000    |       | $                                              | 8.35       |   |
| Granted                                     |       | —     |       | —                                         |       |
| Exercised                                   |       | —     |       | —                                         |       |
| Cancelled                                   |       | —     |       | —                                         |       |
| Outstanding and  exercisable, end of period |       | 135,000    |       | 8.35                                           |       |
|                                             |            |            |            |                                                |            |  |

 

**Restricted Stock:**  In fiscalyear 2007, the Company granted 150,000 shares of the Company’s common stock toits Chairman and Chief Executive Officer as a restricted stock award under the1994 Plan.  These shares vest ratablyover ten fiscal years based on service, beginning on the last day of fiscalyear 2007 and ending on the last day of fiscal year 2016, subject, however, tothe terms applicable to the award, including terms providing for possibleacceleration of vesting upon death, disability, change in control or certainother events.  The weighted average fairvalue for these shares at the grant date was $15.84.  No other shares of restricted stock are currentlyissued as awards under the 1994 Plan.  Asof December 28, 2008, 120,000 shares remain unvested and there was noactivity related to these restricted shares during the third quarter of fiscalyear 2009.  As of December 28, 2008,there was approximately $1.7 million of total unrecognized compensation costsrelated to restricted stock. Unrecognized compensation costs are expected to be recognized ratablyover a period of approximately eight years.

 

8

----

Table ofContents

 

# ***Note 4. Fair Value of Financial Instruments***

# * *

SFASNo. 157 requires that assets and liabilities carried at fair value beclassified and disclosed in one of the following three categories:

·                  Level1: Quoted prices (unadjusted) in active markets for identical assets orliabilities.

·                  Level2: Inputs other than quoted prices included within Level 1 that are observablefor the asset or liability, either directly or indirectly.  These include quoted prices for similarassets or liabilities in active markets, and quoted prices for identical orsimilar assets or liabilities in markets that are not active.

·                  Level3: Unobservable inputs for the asset or liability that reflect the reportingentity’s own assumptions about the inputs used in pricing the asset orliability.

 

Thefollowing table presents information about assets and liabilities recorded atfair value on the Company’s Consolidated Balance Sheet:

 
| ** **                                | ** ** | **Balance at  December 28,  2008** | ** ** | **Quoted Prices  in Active  Markets for  Identical Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
|-------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **Assets:**                               |       |                                         |       |                                                                                            |       |                                                       |       |                                                  |       |
| Interest rate  swap agreement, net of tax |       | $                                            | (154,200   | )                                                                                               | $          | —                                                     |       | $                                                     | (154,200   | ) | $ | — |   |
| Total assets at  fair value               |       | $                                            | (154,200   | )                                                                                               | $          | —                                                     |       | $                                                     | (154,200   | ) | $ | — |   |

 

Thefair value of the Company’s interest rate swap agreement is included in prepaidexpenses and other current assets on the Company’s Consolidated BalanceSheets.  The Company’s fair value of itsinterest rate swap is derived from valuation models commonly used forderivatives. Valuation models require a variety of inputs, includingcontractual terms, market fixed prices, inputs from forward price yield curves,notional quantities, measures of volatility and correlations of such inputs.The Company’s derivatives trade in liquid markets, and as such, model inputscan generally be verified and do not involve significant management judgment.

 

# ***Note 5. Earnings Per Share***

# * *

The dilutive effect of all options, restricted stockgrants and PSUs outstanding has been determined by using the treasury stockmethod.  The weighted average sharesoutstanding is calculated as follows:

 
| ** **                                              | ** ** | **Fiscal Quarters Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|
| ** **                                              | ** ** | **December 28,  2008**         | ** ** | **December 30,  2007**     | ** ** | **December 28,  2008** | ** ** | **December 30,  2007** | ** ** |
|                                                    |       |                                |       |                            |       |   |   |   |   |
| Basic weighted average common shares outstanding        |       | 4,743,300                           |       | 5,151,800                       |       | 4,944,800 |   | 5,299,400 |   |
| Effect of dilutive common stock equivalents outstanding |       | 128,600                             |       | 222,600                         |       | 140,300 |   | 236,400 |   |
| Diluted weighted average common shares outstanding      |       | 4,871,900                           |       | 5,374,400                       |       | 5,085,100 |   | 5,535,800 |   |

 

Asof December 28, 2008, stock options with respect to 135,000 shares ofcommon stock were outstanding. All outstanding options, restricted stock grantsand earned but unvested PSUs were included in the computation of dilutedearnings per share because all such instruments were dilutive.

 

# ***Note 6. Business Segments***

# * *

TheCompany evaluates revenue, gross profit and inventory in three businesssegments:  (1) Networkinfrastructure products, which are used to build, repair and upgrade wirelesstelecommunications, computing and Internet networks, and generally complementradio frequency transmitting and switching equipment provided directly byoriginal equipment manufacturers (OEMs); (2) Mobile devices and accessoryproducts, which include data devices, pagers and two-way radios and relatedaccessories such as replacement batteries, cases, speakers, mobile amplifiers,power supplies, headsets, mounts, car antennas and various wireless datadevices; and (3) Installation, test and maintenance products, which are used toinstall, tune, maintain and repair wireless communications equipment.  Within the mobile devices and accessoriesline of business, the Company sells to both commercial and consumermarkets.  The network infrastructure andinstallation, test and maintenance lines of business sell primarily tocommercial markets.  The Company alsoregularly 

 

9

----

Table of Contents

 

reviewsits results of operations in three commercial customer categories and theconsumer customer category, as described further below:

 

·                  Commercial Public Carriers and Network Operators. Public carriers and network operators includesystems operators that are generally responsible for building and maintainingthe infrastructure system and provide airtime service to individualsubscribers.

 

·                  Commercial Resellers.  Resellersinclude dealers and resellers that sell, install and service cellular telephone, paging and two-way radiocommunications equipment primarily for the consumer and small businessmarkets.  These resellers include localand national proprietorships and retailers, as well as sales and installationcenters operated by cellular and paging carriers.

 

·                  Commercial Self-Maintained Users and Governments. Self-maintained user (SMU) and government customers include commercialentities such as major utilities and transportation companies, federal agenciesand state and local governments, including public safety organizations.

 

·                  Consumers. Consumers include customers that buy through anyof our affinity partner relationships or directly from our consumer website,YourWirelessSource.comTM.

 

TheCompany measures segment performance based on segment gross profit.  The segment operations develop their productoffering, pricing and strategies, which are collaborative with one another andthe centralized sales and marketing function. Therefore, the Company does not segregate assets, other than inventory,for internal reporting, evaluating performance or allocating capital.  Product delivery revenue and certain cost ofsales expenses have been allocated to each segment based on a percentage ofrevenues and/or gross profit, as applicable. The Company’s goodwill at December 28, 2008 relates to acquisitionswithin its network infrastructure line of business.

 

10

----

Table ofContents

 

Segmentactivity for the third quarter of fiscal years 2009 and 2008 is as follows:

 
| **(Amounts in thousands)**             | ** ** | **Network  Infrastructure** | ** ** | **Mobile Devices  and Accessories** | ** ** | **Installation, Test  and Maintenance** | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------|------------|-----------|------------|
| **Fiscal  Quarter ended December 28, 2008** |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial  Revenues:                            |       |                        |       |                                          |       |                                              |       |      |       |
| Public Carriers  and Network Operators           |       | $                           | 11,340     |                                          | $          | 535                                               |       | $         | 3,073      |   | $ | 14,948 |   |
| Resellers                                        |       | 17,981                      |       | 48,432                                        |       | 2,491                                             |       | 68,904    |       |
| SMUs and  Governments                            |       | 14,300                      |       | 3,747                                         |       | 14,389                                            |       | 32,436    |       |
| Total Commercial  Revenues                       |       | 43,621                      |       | 52,714                                        |       | 19,953                                            |       | 116,288   |       |
| Consumer  Revenues                               |       | —                      |       | 2,655                                         |       | —                                            |       | 2,655     |       |
| Total Revenues                                   |       | $                           | 43,621     |                                          | $          | 55,369                                            |       | $         | 19,953     |   | $ | 118,943 |   |
|                                             |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial Gross  Profit:                        |       |                        |       |                                          |       |                                              |       |      |       |
| Public Carriers  and Network Operators           |       | $                           | 2,814      |                                          | $          | 139                                               |       | $         | 687        |   | $ | 3,640 |   |
| Resellers                                        |       | 4,906                       |       | 10,973                                        |       | 656                                               |       | 16,535    |       |
| SMUs and  Governments                            |       | 3,736                       |       | 1,076                                         |       | 3,427                                             |       | 8,239     |       |
| Total Commercial  Gross Profit                   |       | 11,456                      |       | 12,188                                        |       | 4,770                                             |       | 28,414    |       |
| Consumer Gross  Profit                           |       | —                      |       | 853                                           |       | —                                            |       | 853       |       |
| Total Gross  Profit                              |       | $                           | 11,456     |                                          | $          | 13,041                                            |       | $         | 4,770      |   | $ | 29,267 |   |
|                                             |       |                        |       |                                          |       |                                              |       |      |       |
| Product  Inventory                               |       | $                           | 24,048     |                                          | $          | 23,433                                            |       | $         | 4,182      |   | $ | 51,663 |   |
|                                             |       |                        |       |                                          |       |                                              |       |      |       |
| **Fiscal  Quarter ended December 30, 2007** |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial  Revenues:                            |       |                        |       |                                          |       |                                              |       |      |       |
| Public Carriers  and Network Operators           |       | $                           | 13,778     |                                          | $          | 527                                               |       | $         | 3,705      |   | $ | 18,010 |   |
| Resellers                                        |       | 17,084                      |       | 62,975                                        |       | 2,318                                             |       | 82,377    |       |
| SMUs and  Governments                            |       | 13,719                      |       | 3,325                                         |       | 15,856                                            |       | 32,900    |       |
| Total Commercial  Revenues                       |       | 44,581                      |       | 66,827                                        |       | 21,879                                            |       | 133,287   |       |
| Consumer  Revenues                               |       | —                      |       | 2,445                                         |       | —                                            |       | 2,445     |       |
| Total Revenues                                   |       | $                           | 44,581     |                                          | $          | 69,272                                            |       | $         | 21,879     |   | $ | 135,732 |   |
|                                             |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial Gross  Profit:                        |       |                        |       |                                          |       |                                              |       |      |       |
| Public Carriers  and Network Operators           |       | $                           | 3,247      |                                          | $          | 147                                               |       | $         | 822        |   | $ | 4,216 |   |
| Resellers                                        |       | 4,946                       |       | 12,116                                        |       | 678                                               |       | 17,740    |       |
| SMUs and  Governments                            |       | 3,315                       |       | 973                                           |       | 3,260                                             |       | 7,548     |       |
| Total Commercial  Gross Profit                   |       | 11,508                      |       | 13,236                                        |       | 4,760                                             |       | 29,504    |       |
| Consumer Gross  Profit                           |       | —                      |       | 898                                           |       | —                                            |       | 898       |       |
| Total Gross  Profit                              |       | $                           | 11,508     |                                          | $          | 14,134                                            |       | $         | 4,760      |   | $ | 30,402 |   |
|                                             |       |                        |       |                                          |       |                                              |       |      |       |
| Product  Inventory                               |       | $                           | 22,256     |                                          | $          | 28,138                                            |       | $         | 4,077      |   | $ | 54,471 |   |

 

11

----

Tableof Contents

 

Segmentactivity for the first nine months of fiscal years 2009 and 2008 is as follows:

** **
| **(Amounts in thousands)**          | ** ** | **Network  Infrastructure** | ** ** | **Mobile Devices  and Accessories** | ** ** | **Installation, Test  and Maintenance** | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------|------------|-----------|------------|
| **Nine  Months ended December 28, 2008** |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial  Revenues:                         |       |                        |       |                                          |       |                                              |       |      |       |
| Public Carriers  and Network Operators        |       | $                           | 35,545     |                                          | $          | 1,655                                             |       | $         | 10,133     |   | $ | 47,333 |   |
| Resellers                                     |       | 57,072                      |       | 165,185                                       |       | 7,228                                             |       | 229,485   |       |
| SMUs and  Governments                         |       | 41,563                      |       | 11,276                                        |       | 46,677                                            |       | 99,516    |       |
| Total Commercial  Revenues                    |       | 134,180                     |       | 178,116                                       |       | 64,038                                            |       | 376,334   |       |
| Consumer  Revenues                            |       | —                      |       | 8,451                                         |       | —                                            |       | 8,451     |       |
| Total Revenues                                |       | $                           | 134,180    |                                          | $          | 186,567                                           |       | $         | 64,038     |   | $ | 384,785 |   |
|                                          |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial Gross  Profit:                     |       |                        |       |                                          |       |                                              |       |      |       |
| Public Carriers  and Network Operators        |       | $                           | 9,124      |                                          | $          | 468                                               |       | $         | 2,311      |   | $ | 11,903 |   |
| Resellers                                     |       | 15,652                      |       | 37,059                                        |       | 1,888                                             |       | 54,599    |       |
| SMUs and  Governments                         |       | 11,303                      |       | 3,556                                         |       | 10,250                                            |       | 25,109    |       |
| Total Commercial  Gross Profit                |       | 36,079                      |       | 41,083                                        |       | 14,449                                            |       | 91,611    |       |
| Consumer Gross  Profit                        |       | —                      |       | 2,890                                         |       | —                                            |       | 2,890     |       |
| Total Gross  Profit                           |       | $                           | 36,079     |                                          | $          | 43,973                                            |       | $         | 14,449     |   | $ | 94,501 |   |
|                                          |       |                        |       |                                          |       |                                              |       |      |       |
| Product  Inventory                            |       | $                           | 24,048     |                                          | $          | 23,433                                            |       | $         | 4,182      |   | $ | 51,663 |   |
|                                          |       |                        |       |                                          |       |                                              |       |      |       |
| **Nine  Months ended December 30, 2007** |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial  Revenues:                         |       |                        |       |                                          |       |                                              |       |      |       |
| Public Carriers  and Network Operators        |       | $                           | 36,674     |                                          | $          | 1,676                                             |       | $         | 9,731      |   | $ | 48,081 |   |
| Resellers                                     |       | 52,940                      |       | 180,901                                       |       | 6,982                                             |       | 240,823   |       |
| SMUs and  Governments                         |       | 37,156                      |       | 10,088                                        |       | 48,921                                            |       | 96,165    |       |
| Total Commercial  Revenues                    |       | 126,770                     |       | 192,665                                       |       | 65,634                                            |       | 385,069   |       |
| Consumer  Revenues                            |       | —                      |       | 7,611                                         |       | —                                            |       | 7,611     |       |
| Total Revenues                                |       | $                           | 126,770    |                                          | $          | 200,276                                           |       | $         | 65,634     |   | $ | 392,680 |   |
|                                          |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial Gross  Profit:                     |       |                        |       |                                          |       |                                              |       |      |       |
| Public Carriers  and Network Operators        |       | $                           | 8,725      |                                          | $          | 471                                               |       | $         | 2,333      |   | $ | 11,529 |   |
| Resellers                                     |       | 13,664                      |       | 34,565                                        |       | 2,141                                             |       | 50,370    |       |
| SMUs and  Governments                         |       | 9,349                       |       | 3,137                                         |       | 10,048                                            |       | 22,534    |       |
| Total Commercial  Gross Profit                |       | 31,738                      |       | 38,173                                        |       | 14,522                                            |       | 84,433    |       |
| Consumer Gross  Profit                        |       | —                      |       | 2,811                                         |       | —                                            |       | 2,811     |       |
| Total Gross  Profit                           |       | $                           | 31,738     |                                          | $          | 40,984                                            |       | $         | 14,522     |   | $ | 87,244 |   |
|                                          |       |                        |       |                                          |       |                                              |       |      |       |
| Product  Inventory                            |       | $                           | 22,256     |                                          | $          | 28,138                                            |       | $         | 4,077      |   | $ | 54,471 |   |

 

12

----

Table of Contents

 

# ***Note 7. Comprehensive Income***

# * *

The components of totalcomprehensive income were as follows:

 
| ** **                                        | ** ** | **Fiscal Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------|------------|------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **December 28,  2008**        | ** ** | **December 30,  2007**     | ** ** | **December 28,  2008** | ** ** | **December 30,  2007** | ** ** |
|                                              |       |                               |       |                            |       |   |   |   |   |
| Net Income                                        |       | $                                  | 1,241,400  |                            | $          | 1,534,300 |   | $ | 5,542,800 |   | $ | 3,116,700 |   |
| Change in value of interest rate swap, net of tax |       | (101,700                           | )          | (45,100                         | )          | (41,600 | ) | (64,800 | ) |
| Total comprehensive income                        |       | $                                  | 1,139,700  |                            | $          | 1,489,200 |   | $ | 5,501,200 |   | $ | 3,051,900 |   |

 

# ***Note 8. Revolving Credit Facility and Term Loan***

# * *

During the third quarter of fiscal year 2009, the Company,and its primary operating subsidiaries, entered into a Second ModificationAgreement (the “Second Modification Agreement”) with SunTrust Bank and WachoviaBank, National Association, pursuant to which the Credit Agreement for theCompany’s existing $50 million unsecured revolving credit facility was amended.

 

The Second Modification Agreement amended a negative covenantin the Credit Agreement by increasing from $15 million to $25 million theamount of stock permitted to be repurchased by the Company over the term of therevolving credit facility (previously increased to $15 million by the FirstModification Agreement, See Note 9).  In addition, the Second ModificationAgreement positively modified on a going forward basis certain other of thefinancial covenants applicable to the Company under the Credit Agreement, toadjust the definitions of “cash flow” and “tangible net worth” and to affordthe Company limited relief from dividend restrictions.

 

Pursuant to the terms of the relevant documents, thefinancial covenants included in the Credit Agreement are also applicable to theCompany’s existing Term Loan with the same lenders.  Accordingly, theSecond Modification Agreement also had the effect of amending the termsapplicable to the Term Loan.

 

# ***Note 9. Stock Buybacks***

# * *

On April 28, 2003,the Company’s Board of Directors approved a stock buyback program.  As of December 28, 2008, the Board ofDirectors has authorized the purchase of 2,395,567 shares of outstanding commonstock under the stock buyback program.  Shares may be purchasedfrom time to time in the open market, by block purchase, or through negotiatedtransactions, or possibly other transactions managed by broker-dealers.  No time limit has been set for completion orexpiration of the program.  As of December 28,2008, the Company had purchased 2,281,497 shares under the stock buybackprogram for approximately $30.0 million, or an average of $13.16 pershare.  Of the total shares repurchasedunder the stock buyback program, 140,523 shares were repurchased in the firstnine months of fiscal year 2009 for approximately $1.8 million.  As of December 28, 2008, 114,070 sharesremained available for repurchase under this program.

 

Inaddition to the shares repurchased in the stock buyback program discussedimmediately above, on July 1, 2008 the Company repurchased all 470,000shares of its common stock held by Brightpoint, Inc. (“Brightpoint”) in aprivately negotiated transaction. Pursuant to an agreement entered into between the Company andBrightpoint, the Company purchased Brightpoint’s share holdings, comprisingapproximately 9% of the Company’s total then outstanding common stock, for$13.64 per share, or a total of $6,410,800. The price per share was determined based on the seven trading daytrailing average closing price of the Company’s common stock on the NASDAQGlobal Market determined as of the close of trading on June 30, 2008.  The purchase price per share approximated theprice of the Company’s common stock on the transaction date.  The purchase was funded through availablecash and borrowings under the Company’s $50 million unsecured revolving line ofcredit facility.  This transaction wasnot made under, nor does it affect the number of 

 

13

----

Table of Contents

 

sharesavailable for repurchase under, the Company’s stock buyback program discussedabove.  In connection with thistransaction, the Company and certain of its subsidiaries entered into a FirstModification Agreementwith SunTrust Bank and Wachovia Bank, National Association, to amend a negativecovenant included in the Credit Agreement for the Company’s existing $50million unsecured revolving line of credit facility, to increase the amount ofcommon stock permitted to be repurchased by the Company (beginning on theinception date of the Credit Agreement) from $10 million to $15 million, duringthe term of the credit facility (also See Note 8 for additional modificationsto the credit facility).

 

# ***Note 10. Customer Concentration***

# * *

TheCompany’s future results could be negatively impacted by the loss of certaincustomer and/or vendor relationships. For the fiscal quarter and nine months ended December 28, 2008,sales of products to the Company’s top customer relationship, AT&TMobility, accounted for 20% and 23% oftotal revenues, respectively.  Forboth the fiscal quarter and nine months ended December 30, 2007, sales ofproducts to the Company’s top customer relationship, AT&T Mobility,accounted for 24% and 25% of totalrevenues, respectively.  For boththe fiscal quarter and nine months ended December 28, 2008, sales ofproducts to the Company’s Nokia Inc. (“Nokia”) repair and replacement componentrelationship accounted for 7% of totalrevenues.  For both the fiscalquarter and nine months ended December 30, 2007, sales of products to theCompany’s Nokia repair and replacement component relationship accounted for 8% of total revenues.  The Nokia relationship is a completesupply chain relationship and, therefore, the Company has no alternativesources of supply, and the Company’s purchases, and ultimately its resale ofthese products, is dependent upon the continuation of the Nokia relationship.  As of January 2009,the Company and Nokia extended this relationship through December 2010.  As part of this extension, Nokia will become theprimary obligator with several of the Company’s larger Nokia customers.  The Company will continue to earn fees fromNokia to fulfill product to these customers, but Nokia will take on a largerrole in servicing the customer. Therefore, the Company will begin to account for these sales on a netbasis and will receive a smaller fee. The Company will continue toservice and fulfill product to other customers and will continue to recordsales to these customers on a gross basis. The Company also sells productsother than Nokia repair and replacement materials to many of thesecustomers.  Absent this arrangement withNokia, the Company would maintain the ability to sell its other products tothese customers.

 

14

----

Table ofContents

 

**Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

 

Thiscommentary should be read in conjunction with the Management’s Discussion andAnalysis of Financial Condition and Results of Operations from the Company’sAnnual Report on Form 10-K for the fiscal year ended March 30, 2008.

 

**Business Overview and Environment**

 

TESSCOTechnologies Incorporated (TESSCO or the Company) is a leading provider ofintegrated product and supply chain solutions to the professionals that design,build, run, maintain and use wireless mobile, fixed and in-buildingsystems.  Although we sell products to customersin over 100 countries, approximately 95% of our sales are made to customers inthe United States.  We have operationsand office facilities in Hunt Valley, Maryland, Reno, Nevada and San Antonio,Texas.  Due to the diversity of ourbusiness, we are not significantly affected by seasonality.  However, sales to our retailers generallypeak in our second and third quarters in preparation for the winter holidayseason.  Also, our network infrastructuresales are typically affected by weather conditions in the United States,especially in our fourth quarter.

 

We offer a wide range of products that are classified intothree business segments: (1) network infrastructure; (2) mobiledevices and accessories; and (3) installation, test and maintenance.  These segments are described further below:

 

·                  NetworkInfrastructure Products. Network infrastructure products, which are sold to our commercialcustomers, are used to build, repair and upgrade wireless telecommunications,computing and Internet networks. Sales of traditional network infrastructureproducts, such as cable, transmission lines and antennas are in part dependenton capital spending in the wireless communications industry.  However, we have also been growing ouroffering of wireless broadband and network equipment products, which are not asdependent on the overall capital spending of the industry.

 

·                  MobileDevice and Accessory Products. Mobile devices and accessory products include cellular phone and datadevice accessories, as well as two-way radios and related accessories.  Mobile devices and accessory products arewidely sold to commercial customers and consumers.  These commercial customers include retailstores, value-added resellers and dealers, as well as self-maintainedusers.  These consumers are primarilyreached through our affinity partnerships, where we offer services includingcustomized order fulfillment, outsourced call centers, and building andmaintaining private label Internet sites. Approximately 44% of all of ourmobile devices and accessory product sales for the fiscal quarter ended December 28,2008 were generated from sales to AT&T Mobility (“AT&T”).

 

·                  Installation,Test and Maintenance Products. Installation, test and maintenance products, which are sold to ourcommercial customers, are used to install, tune, maintain and repair wirelesscommunications equipment.  Approximately47% of all of our installation, test and maintenance sales for the fiscalquarter ended December 28, 2008 were generated from the sales of repairand replacement parts and materials for original equipment manufacturers,primarily Nokia, Inc. (“Nokia”). The remainder of this segment is made up of sophisticated analysisequipment and various frequency-, voltage- and power-measuring devices, as wellas an assortment of tools, hardware and supplies required by servicetechnicians.

 

Bothour repair and replacement parts sales and consumer mobile devices andaccessory sales through affinity partnerships, are reliant on relationshipswith a small number of vendors.

 

We regularly review four categories within each business segment: (1) commercialpublic carriers and network operators; (2) commercial resellers; (3) commercialself-maintained users and governments; and (4) consumers.  These categories are described further below:

 

·                  Commercial Public Carriers and Network Operators. Public carriers and network operatorsinclude systems operators that are generally responsible for building andmaintaining the infrastructure system and provide airtime service to individualsubscribers.

 

15

----

Tableof Contents

 

·                  Commercial Resellers. Resellers include dealers and resellers that sell,install and service cellular telephone, paging and two-way radio communicationsequipment primarily for the consumer and small business markets.  These resellers include local and nationalproprietorships and retailers, as well as sales and installation centersoperated by cellular and paging carriers.

 

·                  Commercial Self-Maintained Users (SMUs) andGovernments.  SMUs and government customers includecommercial entities such as major utilities and transportation companies,federal agencies and state and local governments, including public safetyorganizations.

 

·                  Consumers.  Consumers arecustomers buying through any of our affinity-partner relationships or directlyfrom our consumer website, YourWirelessSource.comTM.

 

The wirelesscommunications distribution industry is competitive and fragmented, and is comprisedof several national distributors. In addition, many manufacturers sell direct.Barriers to entry for distributors are relatively low, particularly in themobile devices and accessories market, and the risk of new competitors enteringthe market is high.  Consolidation oflarger wireless carriers has and will most likely continue to impact ourcurrent and potential customer base.  Inaddition, the agreements or arrangements with our customers or vendors lookingto us for product and supply chain solutions are typically of limited durationand are terminable by either party upon several months or otherwise relativelyshort notice.  Our ability to maintainthese relationships is subject to competitive pressures and challenges.  We believe, however, that our strength inservice, the breadth and depth of our product offering, our informationtechnology system, and our large customer base and purchasing relationshipswith approximately 360 manufacturers, provides us with a significantcompetitive advantage over new entrants to the market.

 

Our third quarterrevenues decreased by 12.4% compared to the third quarter of last year.  This decrease was driven by a decline in eachof our commercial lines of business.  Grossprofits increased in our installation, test and maintenance line of business ascompared with the third quarter of last year. However, the increase in gross profits from our installation, test andmaintenance line of business was more than offset by a decline in our networkinfrastructure and mobile devices and accessories lines of business.  This overall decrease in gross profit,partially offset by a decrease in operating expenses, resulted in a 19.2%decline in net income and a 13.8% decrease in diluted earnings per share overthe prior-year quarter.

 

The current globalfinancial crisis — which has included, among other things, significantreductions in available capital and liquidity from banks and other providers ofcredit, substantial reductions and/or fluctuations in equity and currency valuesworldwide, significant decreases in consumer confidence and consumer andbusiness spending, and concerns that the worldwide economy may be in aprolonged recessionary period — has adversely affected our customers’ access tocapital and/or willingness to spend capital on our products, and/or theirlevels of cash liquidity with which to pay for our products.  During the third quarter, we have seen andcontinue to see negative impacts of the current global financial crisis,including a decline in our average number of monthly buying customers and inthe average dollars purchased for each buying customer, as well as longer daysto pay from our customers.  We expect theeconomic crisis to continue to have an impact on our operating results duringthe fourth quarter of the fiscal year, especially in our retail and publiccarriers and network operators businesses. In addition, the current global financial crisis may materiallyadversely affect our suppliers’ access to capital and liquidity, which may inturn adversely impact their ability to maintain inventories, production levels,and/or product quality, or cause them to raise prices or lower productionlevels, or result in their ceasing operation. The impact of the crisis on our liquidity is further discussed belowunder the heading “Liquidity.”

 

16

----

Table of Contents

 

**Resultsof Operations**

 

The followingtable summarizes the unaudited results of our operations for the fiscal quarterand nine months ended December 28, 2008 and December 30, 2007:

 
| ** **                                                                  | ** ** | **Fiscal Quarters Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|
| **(Amounts in thousands, except per share  data)** | ** ** | **December 28,  2008**         | ** ** | **December 30,  2007**     | ** ** | **$  Change** | ** ** | **%  Change** | ** ** | **December 28,  2008** | ** ** | **December 30,  2007** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
| Commercial  Revenues                                                        |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Network  Infrastructure:                                                    |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers  and Network Operators                                      |       | $                                   | 11,340     |                            | $          | 13,778 |   | $ | (2,438 | ) | (17.7 | )% | $ | 35,545 |   | $ | 36,674 |   | $ | (1,129 | ) | (3.1 | )% |
| Resellers                                                                   |       | 17,981                              |       | 17,084                          |       | 897 |   | 5.3 | % | 57,072 |   | 52,940 |   | 4,132 |   | 7.8 | % |
| SMUs and  Governments                                                       |       | 14,300                              |       | 13,719                          |       | 581 |   | 4.2 | % | 41,563 |   | 37,156 |   | 4,407 |   | 11.9 | % |
| Total Network  Infrastructure                                               |       | 43,621                              |       | 44,581                          |       | (960 | ) | (2.2 | )% | 134,180 |   | 126,770 |   | 7,410 |   | 5.8 | % |
| Mobile Devices  and Accessories:                                            |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers  and Network Operators                                      |       | 535                                 |       | 527                             |       | 8 |   | 1.5 | % | 1,655 |   | 1,676 |   | (21 | ) | (1.3 | )% |
| Resellers                                                                   |       | 48,432                              |       | 62,975                          |       | (14,543 | ) | (23.1 | )% | 165,185 |   | 180,901 |   | (15,716 | ) | (8.7 | )% |
| SMUs and  Governments                                                       |       | 3,747                               |       | 3,325                           |       | 422 |   | 12.7 | % | 11,276 |   | 10,088 |   | 1,188 |   | 11.8 | % |
| Total Mobile  Devices and Accessories                                       |       | 52,714                              |       | 66,827                          |       | (14,113 | ) | (21.1 | )% | 178,116 |   | 192,665 |   | (14,549 | ) | (7.6 | )% |
| Installation,  Test and Maintenance:                                        |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers  and Network Operators                                      |       | 3,073                               |       | 3,705                           |       | (632 | ) | (17.1 | )% | 10,133 |   | 9,731 |   | 402 |   | 4.1 | % |
| Resellers                                                                   |       | 2,491                               |       | 2,318                           |       | 173 |   | 7.5 | % | 7,228 |   | 6,982 |   | 246 |   | 3.5 | % |
| SMUs and  Governments                                                       |       | 14,389                              |       | 15,856                          |       | (1,467 | ) | (9.3 | )% | 46,677 |   | 48,921 |   | (2,244 | ) | (4.6 | )% |
| Total  Installation, Test and Maintenance                                   |       | 19,953                              |       | 21,879                          |       | (1,926 | ) | (8.8 | )% | 64,038 |   | 65,634 |   | (1,596 | ) | (2.4 | )% |
| Total Commercial  Revenues                                                  |       | 116,288                             |       | 133,287                         |       | (16,999 | ) | (12.8 | )% | 376,334 |   | 385,069 |   | (8,735 | ) | (2.3 | )% |
| Consumer Revenues  - Mobile Devices and Accessories                         |       | 2,655                               |       | 2,445                           |       | 210 |   | 8.6 | % | 8,451 |   | 7,611 |   | 840 |   | 11.0 | % |
| Total Revenues                                                              |       | $                                   | 118,943    |                            | $          | 135,732 |   | $ | (16,789 | ) | (12.4 | )% | $ | 384,785 |   | $ | 392,680 |   | $ | (7,895 | ) | (2.0 | )% |
|                                                                        |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial Gross  Profit                                                    |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Network  Infrastructure:                                                    |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers  and Network Operators                                      |       | $                                   | 2,814      |                            | $          | 3,247 |   | $ | (433 | ) | (13.3 | )% | $ | 9,124 |   | $ | 8,725 |   | $ | 399 |   | 4.6 | % |
| Resellers                                                                   |       | 4,906                               |       | 4,946                           |       | (40 | ) | (0.8 | )% | 15,652 |   | 13,664 |   | 1,988 |   | 14.5 | % |
| SMUs and  Governments                                                       |       | 3,736                               |       | 3,315                           |       | 421 |   | 12.7 | % | 11,303 |   | 9,349 |   | 1,954 |   | 20.9 | % |
| Total Network  Infrastructure                                               |       | 11,456                              |       | 11,508                          |       | (52 | ) | (0.5 | )% | 36,079 |   | 31,738 |   | 4,341 |   | 13.7 | % |
| Mobile Devices  and Accessories:                                            |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers  and Network Operators                                      |       | 139                                 |       | 147                             |       | (8 | ) | (5.4 | )% | 468 |   | 471 |   | (3 | ) | (0.6 | )% |
| Resellers                                                                   |       | 10,973                              |       | 12,116                          |       | (1,143 | ) | (9.4 | )% | 37,059 |   | 34,565 |   | 2,494 |   | 7.2 | % |
| SMUs and  Governments                                                       |       | 1,076                               |       | 973                             |       | 103 |   | 10.6 | % | 3,556 |   | 3,137 |   | 419 |   | 13.4 | % |
| Total Mobile  Devices and Accessories                                       |       | 12,188                              |       | 13,236                          |       | (1,048 | ) | (7.9 | )% | 41,083 |   | 38,173 |   | 2,910 |   | 7.6 | % |
| Installation,  Test and Maintenance:                                        |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers  and Network Operators                                      |       | 687                                 |       | 822                             |       | (135 | ) | (16.4 | )% | 2,311 |   | 2,333 |   | (22 | ) | (0.9 | )% |
| Resellers                                                                   |       | 656                                 |       | 678                             |       | (22 | ) | (3.2 | )% | 1,888 |   | 2,141 |   | (253 | ) | (11.8 | )% |
| SMUs and  Governments                                                       |       | 3,427                               |       | 3,260                           |       | 167 |   | 5.1 | % | 10,250 |   | 10,048 |   | 202 |   | 2.0 | % |
| Total  Installation, Test and Maintenance                                   |       | 4,770                               |       | 4,760                           |       | 10 |   | 0.2 | % | 14,449 |   | 14,522 |   | (73 | ) | (0.5 | )% |
| Total Commercial  Gross Profit                                              |       | 28,414                              |       | 29,504                          |       | (1,090 | ) | (3.7 | )% | 91,611 |   | 84,433 |   | 7,178 |   | 8.5 | % |
| Consumer Gross  Profit - Mobile Devices and Accessories                     |       | 853                                 |       | 898                             |       | (45 | ) | (5.0 | )% | 2,890 |   | 2,811 |   | 79 |   | 2.8 | % |
| Total Gross  Profit                                                         |       | 29,267                              |       | 30,402                          |       | (1,135 | ) | (3.7 | )% | 94,501 |   | 87,244 |   | 7,257 |   | 8.3 | % |
| Selling, general  and administrative expenses                               |       | 26,868                              |       | 27,729                          |       | (861 | ) | (3.1 | )% | 84,661 |   | 81,738 |   | 2,923 |   | 3.6 | % |
| Income from  operations                                                     |       | 2,399                               |       | 2,673                           |       | (274 | ) | (10.3 | )% | 9,840 |   | 5,506 |   | 4,334 |   | 78.7 | % |
| Interest expense,  net                                                      |       | 214                                 |       | 160                             |       | 54 |   | 33.8 | % | 516 |   | 337 |   | 179 |   | 53.1 | % |
| Income before  provision for income taxes                                   |       | 2,185                               |       | 2,513                           |       | (328 | ) | (13.1 | )% | 9,324 |   | 5,169 |   | 4,155 |   | 80.4 | % |
| Provision for  income taxes                                                 |       | 944                                 |       | 978                             |       | (34 | ) | (3.5 | )% | 3,781 |   | 2,052 |   | 1,729 |   | 84.3 | % |
| Net income                                                                  |       | $                                   | 1,241      |                            | $          | 1,535 |   | $ | (294 | ) | (19.2 | )% | $ | 5,543 |   | $ | 3,117 |   | $ | 2,426 |   | 77.8 | % |
| Diluted earnings  per share                                                 |       | $                                   | 0.25       |                            | $          | 0.29 |   | $ | (0.4 | ) | (13.8 | )% | $ | 1.09 |   | $ | 0.56 |   | $ | 0.53 |   | 94.6 | % |

 

17

----

Tableof Contents

 

**Third Quarter of Fiscal Year 2009 Compared withThird Quarter of Fiscal Year 2008**

 

**Revenues. **Revenues for the third quarter of fiscal year 2009decreased 12.4% as compared with the third quarter of fiscal year 2008,primarily due to a 12.8% decrease in commercial revenues, partially offset byan 8.6% increase in consumer revenues. Sales decreased across all commercial lines of business.

 

Networkinfrastructure sales decreased 2.2% as compared with the third quarter offiscal year 2008, as a result of lower sales of broadband products across allof our market categories.  Sales of RFpropagation products to public carriers and network operators declinedsignificantly, but were partially offset by increased sales to resellers andself-maintained users.

 

Sales in themobile devices and accessories line of business decreased 20.1% in the thirdquarter of fiscal year 2009, as compared with the same period last year.  The decrease was due to a 21.1% decrease incommercial sales, partially offset by an 8.6% increase in consumer sales.  The decrease in commercial revenues formobile devices and accessories, which are sold primarily to resellers, wasprimarily due to decreased sales to a large national tier-one carrier, as wellas other smaller resellers and users. Sales of mobile devices and accessories to public carriers and networkoperators and SMUs and governments both increased.

 

Revenues from ourinstallation, test and maintenance line of business decreased 8.8% from theprior-year quarter, primarily due to a decrease in the sale of test equipment,tools and supply products to our public carriers and network operators and SMUsand governments market categories, despite an increase in sales toresellers.  Sales of repair parts relatedto our major repair components relationship with Nokia also declined in thethird quarter of fiscal year 2009, as compared with the third quarter of fiscalyear 2008.  We also expect that revenuesand gross profits related to this Nokia relationship will decrease in thefourth quarter and beyond.  As of January 2009,TESSCO and Nokia extended their relationship through December 2010.  As part of this extension, Nokia will becomethe primary obligor with several of our larger Nokia customers.  TESSCO will continue to earn fees from Nokiato fulfill product to these customers, but Nokia will take on a larger role inservicing the customer.  As a result,TESSCO will begin to account for these sales on a net basis and will receive asmaller fee. TESSCO will continue to service and fulfill product to othercustomers and will continue to record sales to these customers on a grossbasis.

 

**GrossProfit. **Gross profit for the third quarter of fiscal year 2009decreased 3.7% as compared with the third quarter of fiscal year 2008. Totalcommercial gross profit decreased 3.7%, while consumer gross profit decreased5.0%.  Gross profit margin increased to24.6% in the third quarter of fiscal year 2009 from 22.4% in third quarter offiscal year 2008.  Gross profit margin inour network infrastructure segment increased from 25.8% in the third quarter offiscal year 2008 to 26.3% in the third quarter of fiscal year 2009.  This increase in gross profit margin was aresult of the change in product mix described above, as radio frequency andsite support products typically have a higher gross margin than broadbandproducts, which had a decline in sales. Gross profit margin in our mobile devices and accessories segmentincreased to 23.6% in the third quarter of this fiscal year from 20.4% in thethird quarter of last fiscal year.  Thisincrease was primarily attributable to the commercial gross profit margin forour mobile devices and accessories, which increased to 23.1% in the thirdquarter of fiscal year 2009 from 19.8% for the third quarter of fiscal year2008, principally due to product mix in sales to a large tier-one carrier andother retail customers.  Consumer grossprofit margin for our mobile devices and accessories decreased to 32.1% in thethird quarter of this fiscal year from 36.7% for the third quarter of lastfiscal year.  Gross profit margin in ourinstallation, test and maintenance line of business increased from 21.8% in thethird quarter of fiscal year 2008 to 23.9% in the third quarter of fiscal year2009.  Generally, our gross margins byproduct within these segments have been sustained, except as noted above, andgenerally these variations are related to sales mix within the segment productofferings.  We account for inventory atthe lower of cost or market, and as a result, write-offs/write-downs occur dueto damage, deterioration, obsolescence, changes in prices and other causes.

 

Our ongoing ability to earn revenues and gross profits from customersand vendors looking to us for product and supply chain solutions is dependentupon a number of factors.  The terms, andaccordingly the factors, applicable to each affinity relationship often differ.  Among these factors are the strength of thecustomer’s or vendor’s business, the supply and demand for the product orservice, including price stability, changing customer or vendor requirements,and our ability to support the customer or vendor and to continuallydemonstrate that we can improve the way they do business.  In addition, the agreements or arrangementson which our affinity relationships are based are typically of limitedduration, and are terminable by either party upon several months or otherwiserelatively short notice.  These affinityrelationships could also be affected by wireless carrier consolidation or theglobal financial crisis.

 

18

----

Table ofContents

 

As total revenuesand gross profits from larger customer and vendor relationships, includingAT&T, increase, we occasionally experience and expect to continue toexperience pricing pressures that may adversely affect future results. In aneffort to mitigate the overall effect of these pressures and to meet theseconsistent challenges, we are focused on our continuing efforts to growrevenues and gross profits from other customer and vendor relationships.

 

**Selling,General and Administrative Expenses.** Total selling,general and administrative expenses decreased by 3.1% in the third quarter offiscal year 2009 as compared with the third quarter of fiscal year 2008.  Selling, general and administrative expensesas a percentage of revenues increased to 22.6% in the third quarter of fiscalyear 2009 from 20.4% in the third quarter of fiscal year 2008.  The largest factors contributing to thedecrease in total selling, general and administrative expenses were decreasedmarketing and sales promotion, freight, and information technology expenses,partially offset by increased compensation expense during the third quarter offiscal year 2009.

 

Marketing and salespromotion expenses decreased by approximately $649,400 in the third quarter offiscal year 2009 as compared with the third quarter of fiscal year 2008,primarily due to decreased expenses incurred for branding initiatives andpublications in the third quarter of fiscal year 2009 as compared to the prioryear.

 

Freight expense decreasedby approximately $481,000 due to a lower volume of packages shipped in thethird quarter of fiscal year 2009.

 

Information technologyexpense decreased by approximately $366,200 in the third quarter of fiscal year2009 as compared with the third quarter of fiscal year 2008, primarily due to adecrease in depreciation expense, and to a much lesser extent, a decrease insoftware maintenance and licenses.

 

Compensation expensesrelated to business generation and fulfillment activities increased in thethird fiscal quarter of 2009 as compared to the same period last year.  Compensation costs were partially offset inthe third fiscal quarter of 2009 by decreased expenses related to our cash andequity bonus programs.  Our bonusprograms are performance based and therefore, the decrease in bonus expenses isdue to the decline in results during the third quarter and first nine months offiscal year 2009, as well as projected results for the remainder of the fiscalyear, when applied to pre-defined performance targets.  Total compensation costs, including benefitsand bonus expense, increased approximately $715,700 in the third quarter offiscal year 2009, as compared to the third quarter of fiscal year 2008.

 

We continually evaluatethe credit worthiness of our existing customer receivable portfolio and providean appropriate reserve based on this evaluation.  We also evaluate the credit worthiness ofprospective and current customers and make decisions regarding extension ofcredit terms to such customers based on this evaluation.  Accordingly, we recorded a provision for bad debts of $756,800 and$258,100 for the third quarter ended December 28, 2008 and December 30,2007, respectively.  This increase in baddebt expense is related to customer write-offs during the third quarter of thisfiscal year and the anticipation for further increases in write-offs related tooutstanding receivables as of December 28, 2008, due to the downturn inthe global economy as discussed above.

 

**InterestExpense, Net.**  Net interest expense increased from $161,000in the third quarter of fiscal year 2008 to $213,700 in the third quarter offiscal year 2009, primarily due to increased average borrowings on ourrevolving line of credit facility.

 

**IncomeTaxes, Net Income and Diluted Earnings per Share.** The effective tax rate in the third quarter offiscal year 2009 was 43.2% as compared with 38.9% in the third quarter offiscal year 2008.  The increase in thetax rate is primarily attributable to an increase in non-deductible expenses asa percentage of income, resulting from a decrease in our projected income forfiscal year 2009 as compared to our projection made at the end of the secondquarter of fiscal year 2009, and to a lesser extent, changes in our state taxeffective rate.  As a result of thefactors discussed above, net income and diluted earnings per share for thethird quarter of fiscal year 2009 decreased 19.2% and 13.8%, respectively,compared to the prior-year quarter.

 

**First Nine Months of Fiscal Year 2009Compared with First Nine Months of Fiscal Year 2008**

 

**Revenues. **Revenues for the first nine months of fiscal year 2009decreased 2.0% as compared with the first nine months of fiscal year 2008,primarily due to a 2.3% decline in commercial revenues, partially offset by an11.0% increase in consumer revenues.  Thedecline in revenue was primarily driven by decreased sales in our mobiledevices and 

 

19

----

Table ofContents

 

accessories and installation,test and maintenance lines of business, while sales in our networkinfrastructure line of business increased.

 

Sales in thenetwork infrastructure line of business increased 5.8% in the first nine monthsof fiscal year 2009, as compared with the prior-year period. The increase wasprimarily the result of higher sales of radio frequency propagation and sitesupport products across our resellers and SMUs and government marketcategories, partially offset by lower sales of broadband products across all ofour market categories.

 

Mobile devices andaccessories sales declined as compared with the first nine months of fiscalyear 2008, primarily due to a decrease in commercial sales, partially offset byan increase in consumer sales.  Sales in thecommercial mobile devices and accessories line of business decreased in ourpublic carriers and network operators and resellers market categories, offsetby a increase in sales to our SMUs and governments market category.

 

Revenues from ourinstallation, test and maintenance line of business had a 2.4% decrease fromthe prior year period, due to a large decrease in sales of repair parts relatedto our major repair components relationship with Nokia, partially offset by anincrease in sales of our non-parts installation, test and maintenance business.

 

**GrossProfit. **Gross profit for the first nine months of fiscal year2009 increased 8.3% as compared with the first nine months of fiscal year 2008.Total commercial gross profit increased 8.5%, while consumer gross profitincreased 2.8% over the prior year period. Gross profit margin increased to 24.6% in the first nine months offiscal year 2009 from 22.2% in the first nine months of fiscal year 2008.  Gross profit margin in our networkinfrastructure segment increased from 25.0% in the first nine months of fiscalyear 2008 to 26.9% in the first nine months of 2009.  In our installation, test and maintenancesegment, gross profit margin increased to 22.6% in the first nine months offiscal year 2009 from 22.1% in the first nine months of fiscal year 2008.  Gross profit margin in our mobile devices andaccessories segment increased to 23.6% in the first nine months of this fiscalyear from 20.5% in the first nine months of last fiscal year primarily due toproduct mix in sales to a large tier-one carrier.  Commercial gross profit margin for our mobiledevices and accessories increased to 23.1% in the first nine months of thisfiscal year from 19.8% for the first nine months of last fiscal year.  Consumer gross profit margin for our mobiledevices and accessories decreased to 34.2% in the first nine months of thisfiscal year from 36.9% for the first nine months of last fiscal year.  Generally, our gross margins by productwithin these segments have been sustained, and generally these variations arerelated to sales mix within the segment product offerings.  We account for inventory at the lower of costor market, and as a result, write-offs/write-downs occur due to damage, deterioration,obsolescence, changes in prices and other causes.

 

**Selling,General and Administrative Expenses.** Total selling,general and administrative expenses increased by 3.6% in the first nine monthsof fiscal year 2009 as compared with the first nine months of fiscal year2008.  Selling, general andadministrative expenses as a percentage of revenues increased to 22.0% in thefirst nine months of fiscal year 2009 from 20.8% in the first nine months offiscal year 2008.  The largest factorscontributing to the increase in total selling, general and administrativeexpenses were increased compensation expense, bonus expense, and occupancycosts, partially offset by decreased marketing and sales promotion, freight,and information technology expenses during the first nine months of fiscal year2009.

 

Compensation expensesrelated to business generation and fulfillment activities increased in thefirst nine months of fiscal year 2009 as compared to the same period lastfiscal year.  Compensation costs havealso increased over the first nine months of last fiscal year due to increasedexpense related to our cash and equity bonus programs.  Our bonus programs are performance based, andtherefore, the increase in bonus expense is due to improved results during thefirst nine months of fiscal year 2009, as well as projected results for theremainder of the fiscal year, as applied to pre-defined performancetargets.  Total compensation costs,including benefits and bonus expense, increased by approximately $6.9 millionfrom the first nine months of fiscal year 2008 to the first nine months offiscal year 2009.

 

Occupancy costsincreased by approximately $668,000 in the first nine months of fiscal year2009 as compared with the first nine months of fiscal year 2008, primarily dueto increased utilities costs as well as rent and building maintenance costsrelated to our lease arrangement for additional office and warehouse space inHunt Valley, Maryland beginning in the second quarter of fiscal year 2008.

 

Marketing and salespromotion expenses decreased by approximately $1.9 million in the first ninemonths of fiscal year 2009 as compared with the first nine months of fiscalyear 2008.  This decrease is primarilydue to decreased expenses 

 

20

----

Table of Contents

 

incurred related to abranding initiative performed in the prior fiscal year, decreases in marketresearch expenses, publications**expenses, andprint and online advertising, as well as decreased racks and graphics expenseassociated with our retail business.

 

Freight expense decreasedby approximately $1.7 million in the first nine months of fiscal year 2009 ascompared to the same period last year, due to increased productivity in ourdistribution operations and a lower volume of packages shipped, partiallyoffset by higher fuel surcharges.

 

Information technologyexpense decreased by approximately $755,800 in the first nine months of fiscalyear 2009 as compared with the first nine months of fiscal year 2008, primarilydue to a decrease in depreciation expense, and to a much lesser extent, adecrease in software maintenance and licenses.

 

We continually evaluatethe credit worthiness of our existing customer receivable portfolio and providean appropriate reserve based on this evaluation.  We also evaluate the credit worthiness ofprospective and current customers and make decisions regarding extension ofcredit terms to such prospects based on this evaluation.  Accordingly, we recorded a provision for bad debts of $1,250,100 and$566,200 for the first nine months of fiscal year 2009 and fiscal year 2008,respectively.  This increase in bad debtexpense is related to customer write-offs during the first nine months of thisfiscal year and the anticipation for further increases in write-offs related tooutstanding receivables as of December 28, 2008, due to the downturn inthe global economy as discussed above.

 

**InterestExpense, Net.**  Net interest expense increased from $337,800in the first nine months of fiscal year 2008 to $516,400 in the first ninemonths of fiscal year 2009, primarily due to increased average borrowings onour revolving line of credit facility.

 

**IncomeTaxes, Net Income and Diluted Earnings per Share.** The effective tax rate in the first ninemonths of fiscal year 2009 was 40.6% as compared with 39.7% in the first ninemonths of fiscal year 2008.  The increasein the tax rate is primarily attributable to changes in our state tax effectiverate.  As a result of the factorsdiscussed above, net income and diluted earnings per share for the first ninemonths of fiscal year 2009 increased 77.8% and 94.6%, respectively, compared tothe prior year.

 

**Liquidity and Capital Resources**

 
| ** **                                             | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **December 28,  2008**     | ** ** | **December 30,  2007** | ** ** |
| Cash flows  provided by operating activities           |       | $                               | 8,540,500  |   | $ | 472,800 |   |
| Cash flows used  in investing activities               |       | (3,580,100                      | )          | (4,612,900 | ) |
| Cash flows (used  in) provided by financing activities |       | (5,613,400                      | )          | 1,252,000 |   |
| Net decrease in cash  and cash equivalents             |       | $                               | (653,000   | ) | $ | (2,888,100 | ) |

 

We generated $8.5million of net cash from operating activities in the first nine months offiscal year 2009 compared with $0.5 million in the first nine months of fiscalyear 2008.  In the first nine months offiscal year 2009, our cash inflow from operating activities was primarilydriven by net income, net of depreciation and amortization and non-cash stockcompensation expense, as well as by a significant decrease in trade accountsreceivable and an increase in accrued payroll, benefits and taxes, partiallyoffset by a decrease in accounts payable and an increase in productinventory.  The decrease in tradeaccounts receivable is primarily due to the timing of sales and collectionslargely related to our large tier-one carrier as well as lower sales in thethird quarter of fiscal year 2009.  Theaccrual for payroll, benefits and taxes increased primarily due to an increasein accruals for our bonus programs in the first nine months of fiscal year 2009.  The decrease in accounts payable is largelydue to the timing and credit terms of inventory receipts.  The increased inventory levels are to improveour inventory availability for our customers.

 

Capitalexpenditures of $2.5 million in the first nine months of fiscal year 2009 werein line with expenditures of $2.3 million in the first nine months of fiscalyear 2008.  In both periods, capitalexpenditures primarily consisted of investments in information technology.

 

21

----

Table ofContents

 

We are party to a$50 million unsecured revolving credit facility with SunTrust Bank and WachoviaBank, National Association, with a term expiring May 2010 and interestpayable monthly at the LIBOR rate plus an applicable margin, which ranges from1.25% to 2.75%.  Borrowing availabilityunder this facility is determined in accordance with a borrowing base and the applicablecredit agreement includes financial covenants, including a minimum tangible networth, minimum cash flow coverage of debt service, and a maximum funded debt toEBITDA ratio.  These financial covenantsalso apply to a separate but related term loan secured by our Hunt Valley, Marylandfacility.  The terms applicable to ourrevolving credit facility and term loan also limit our ability to engage incertain transactions or activities, including (but not limited to) investmentsand acquisitions, sales of assets, payment of dividends, issuance of additionaldebt and other matters.  As of December 28,2008, we had $6.2 million outstanding on our $50 million revolving creditfacility; therefore, we had $43.8 million available on our revolving creditfacility subject to the limitations imposed by the borrowing base and ourcontinued compliance with the other applicable terms, including the covenantsdiscussed above.  In addition to therevolving credit facility, at December 28, 2008, the principal balance ofthe related term loan secured by our Hunt Valley, Maryland facility was $3.5million.

 

During the third quarter of fiscal year 2009, we entered intoa Second Modification Agreement (the “Second Modification Agreement”) withSunTrust Bank and Wachovia Bank, National Association, pursuant to which theCredit Agreement for our existing $50 million unsecured revolving creditfacility was amended.  The SecondModification Agreement amended a negative covenant in the Credit Agreement byincreasing from $15 million to $25 million the amount of stock permitted to berepurchased over the term of the revolving credit facility.  In addition,the Second Modification Agreement positively adjusted on a going forward basiscertain other of the financial covenants applicable to us under the Credit Agreement,to adjust the definitions of “cash flow” and “tangible net worth” and to affordus limited relief from dividend restrictions.

 

Pursuant to the terms of the relevant documents, thefinancial covenants included in the Credit Agreement are also applicable to therelated Term Loan with the same lenders.  Accordingly, the SecondModification Agreement also has the effect of amending the terms applicable tothe Term Loan.

 

OnApril 21, 2006, we acquired substantially all the non-cash net assets ofTerraWave Solutions, Ltd. and its commonly owned affiliate, GigaWaveTechnologies, Ltd. for an initial cash payment of approximately $3.8 million,and additional cash earn-out payments over a four-year period, contingent onthe achievement of certain minimum earnings thresholds ($1.5 million of the$3.8 million cash amount paid at closing was a non-refundable prepaymentagainst future earn-out payments, if any, amortizable over the four-yearperiod).  To the extent that certain minimumearnings thresholds are not achieved, we will not be able to recover thisprepayment.  The maximum amount ofcontingent future earn-out payments as of December 28, 2008 (aftersubtracting the $1.5 million prepayment) is $11.9 million.  Contingent payments made under the terms ofthe purchase agreement are treated as an additional cost of the acquiredbusinesses and additional goodwill has been and will continue to be recorded,if earnings targets are achieved.  For the nine month period ended December 28,2008, approximately $1.3 million was paid for additional earn-out based onachievement of certain earnings thresholds in accordance with the terms of thepurchase agreement.  As of December 28, 2008, an additionalearn-out of $100,000 has been accrued and is anticipated to be paid, along withany additional amounts earned over the remaining three months of fiscal year2009, in the first quarter of fiscal year 2010.

 

Net cash used infinancing activities was $5.6 million in the first nine months of fiscal year2009 compared with a net cash inflow from financing activities of $1.3 million forthe first nine months of fiscal year 2008. For fiscal year 2009, our cash outflow from financing activities wasprimarily due to treasury stock purchases, both under our stock buyback programand through a one time privately negotiated transaction, partially offset byborrowings on our revolving line of credit. For fiscal year 2008, our cash inflow from financing activities wasprimarily driven by borrowings on our revolving line of credit and excess taxbenefits from stock-based compensation, partially offset by the purchase oftreasury stock.  During the first ninemonths of fiscal years 2009, we repurchased 140,523 shares of our outstandingcommon stock for approximately $1.8 million pursuant to our stock buybackprogram, compared with 346,107 shares purchased during the first nine months offiscal year 2008 for approximately $4.8 million. From the beginning of ourstock buyback program (the first quarter of fiscal year 2004), through the endof the third quarter of fiscal year 2009, a total of 2,281,497 shares have beenpurchased under this program for approximately $30.0 million, or an averageprice of $13.16 per share.  The Board ofDirectors has authorized the purchase of up to 2,395,567 shares in theaggregate pursuant to this program, and therefore, 114,070 shares remainedavailable to be purchased as of the end of the third quarter of fiscal year2009.  We expect to fund futurepurchases, if any, from working capital and/or our revolving credit facility.  No timetable has been set for the completionor expiration of this program.

 

22

----

Table of Contents

 

OnJuly 1, 2008, separate from, and in addition to, our stock buybackprogram, we repurchased all 470,000 shares of our common stock then held byBrightpoint, Inc. (“Brightpoint”) in a privately negotiatedtransaction.  Pursuant to an agreemententered into between us and Brightpoint, we purchased Brightpoint’s shareholdings, comprising approximately 9% of our total then outstanding commonstock, for $13.64 per share, or a total of $6.4 million.  The price per share was determined based onthe seven trading day trailing average closing price of our common stock on theNASDAQ Global Market determined as of the close of trading on June 30,2008.  The purchase price per shareapproximated the price of our common stock on the transaction date.  The purchase was funded through availablecash and borrowings under our revolving credit facility.  This transaction does not affect the numberof shares available for repurchase under our stock buyback program.

 

We believe that ourexisting cash, payments from customers, and availability under our revolvingcredit facility will be sufficient to support our operations for at least thenext twelve months.  To minimize interestexpense, our policy is to use excess available cash to pay down any balance onour revolving credit facility.  We expectto meet short-term and long-term liquidity needs through operating cash flow,supplemented by our revolving credit facility. In doing so, the balance on our revolving credit facility could increasedepending on our working capital and other cash needs.  If we were to undertake an acquisition orother major capital purchases that require funds in excess of existing sourcesof liquidity, we would look to sources of funding from additional creditfacilities, debt and/or equity issuances. There can be no assurances that such additional future sources offunding would be available on terms acceptable to us, if at all.

 

In addition, ourliquidity could be negatively impacted by decreasing revenues and profitsresulting from a decrease in demand for our products or a reduction in capitalexpenditures by our customers, or by the weakened financial conditions of ourcustomers or suppliers, in each case as a result of the downturn in the globaleconomy, among other facts.

 

As noted above, weare party to an existing $50 million unsecured revolving credit facility withSunTrust Bank and Wachovia Bank, National Association, as administrativeagent.  Under the terms of the applicablecredit agreement, SunTrust is a 70% participant and Wachovia is a 30%participant, with each committed to fund draws accordingly.  The recent global financial crisis hasresulted in the bankruptcy or acquisition of, or government assistance to,several major domestic and international financial institutions.  On December 31, 2008, Wells Fargo &Company announced the closing of a merger with Wachovia Corporation, howeverthis transaction had no impact on our $50 million revolving credit facilitywith SunTrust Bank and Wachovia Bank, National Association.  In addition, the term of our revolving creditfacility currently expires in May 2010 and we are uncertain as to what theimpact of the financial crisis will be on our ability to extend or replace thefacility on or prior to that date.  Alsothe terms that we may be able to obtain on an extended or replacement facility,if any, could include higher interest rate spreads and/or require us to grant asecurity interest in company assets. Should our access to borrowings be impaired, it could have a materialadverse effect on our business.

 

**Recent Accounting Pronouncements**

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 157, “Fair ValueMeasurements.”  SFAS No. 157 definesfair value, establishes a framework for measuring fair value, and expandsdisclosures about fair value measurements. Effective March 31, 2008, we adopted SFAS No. 157 for ourfinancial assets and liabilities. However, in February 2008, the FASB partially deferred theeffective date of SFAS No. 157, until fiscal years beginning after November 15,2008 or in our case, the fiscal year beginning March 30, 2009, as itrelates to certain non-financial assets and liabilities that are recognized ordisclosed at fair value in the financial statements on a nonrecurringbasis.  The adoption of SFAS No. 157did not have a material impact on our consolidated financial statements.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair ValueOption for Financial Assets and Financial Liabilities — Including an Amendmentof FASB Statement No. 115.”  SFAS No. 159permits an entity to measure many financial instruments and certain other itemsat fair value that are not currently required to be measured at fairvalue.  Entities that elect the fairvalue option will report unrealized gains and losses in earnings at eachsubsequent reporting date.  SFAS No. 159is effective for fiscal years beginning after November 15, 2007.  We adopted SFAS No. 159 effective as of March 31,2008.  As we did not elect to apply thefair value option as described under SFAS No. 159 to any of our financialassets or 

 

23

----

Table ofContents

 

liabilities which were not currently required to be measured at fairvalue, the adoption did not have an impact on our consolidated financialstatements.

 

In December 2007, the FASB issued SFAS No. 141(R),“Business Combinations,” which replaces SFAS No. 141.  The standard retains the fundamentalrequirements of SFAS No. 141 that the acquisition method of accounting(labeled the purchase method under SFAS No. 141) be used for all businesscombinations and that an acquirer be identified for each businesscombination.  SFAS No. 141(R) requiresthe assets, liabilities, noncontrolling interests, certain acquiredcontingencies and contingent consideration acquired during a businesscombination to be measured at their fair value as of the acquisition date.  SFAS No. 141(R) is effective forfiscal years beginning on or after December 15, 2008.  We will adopt SFAS No. 141(R) on March 30,2009.

 

In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities — an amendmentof FASB Statement No. 133.”  UnderSFAS No. 161, entities are required to provide enhanced disclosures about (a) howand why an entity uses derivative instruments, (b) how derivativeinstruments and related hedged items are accounted for under FASB Statement No. 133and its related interpretations, and (c) how derivative instruments andrelated hedged items affect an entity’s financial position, financialperformance and cash flows.  Theprovisions of this statement are effective for periods beginning after November 15,2008, and both early application and comparative disclosures areencouraged.  We are currently reviewingSFAS No. 161 to determine the impact, if any, of adoption on ourconsolidated financial statements.

 

In May 2008, the FASB issued SFAS No. 162,“The Hierarchy of Generally Accepted Accounting Principles.”  This standard identifies the sources ofaccounting principles and the framework for selecting the principles to be usedin the preparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles.  SFAS No. 162 directs the hierarchy tothe entity, rather than the auditors, as the entity is responsible forselecting accounting principles for financial statements that are presented inconformity with generally accepted accounting principles.  SFAS No. 162 is effective 60 daysfollowing the SEC’s September 16, 2008 approval of the Public CompanyAccounting Oversight Board (PCAOB) amendments to remove the hierarchy foraccounting principles generally accepted in the United States from the PCAOB’sauditing standards.  We do not expectSFAS No. 162 to have an impact on our consolidated financial statements.

 

In June 2008, the FASB issued FASB StaffPosition No. 03-6-1, “Determining Whether Instruments Granted inShare-Based Payment Transactions Are Participating Securities (FSP No. 03-6-1).”  FSP No. 03-6-1 requires companies totreat unvested share-based payment awards that have non-forfeitable rights todividend or dividend equivalents as participating securities.  Therefore, these financial instruments mustbe included in calculating basic and diluted earnings per share under thetwo-class method described in SFAS No. 128, “Earnings Per Share.”  All prior period EPS data presented should beadjusted retrospectively upon adoption. FSP No. 03-6-1 will be effective for fiscal years beginning after December 15,2008.  Therefore, we are required toadopt FSP No. 03-6-1 on March 30, 2009.  We currently have 120,000 awards that fallunder the requirements of FSP No. 03-6-1, but we do not expect theadoption to have a material impact on our basic and diluted earnings per sharecalculations.

 

**Critical Accounting Policies and Estimates**

 

Our discussion andanalysis of our financial condition and results of operations are based on ourunaudited consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the UnitedStates.  The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amount of assets, liabilities,revenues and expenses and related disclosure of contingent assets andliabilities.  Actual results may differ from these estimates underdifferent assumptions or conditions.

 

For a detailed discussionon our critical accounting policies, please refer to our Annual Report on Form 10-Kfor the fiscal year ended March 30, 2008.

 

24

----

Tableof Contents

 

**Off-Balance Sheet Arrangements**

 

We have no material off-balance sheet arrangements.

 

**Forward-Looking Statements**

 

This Report maycontain forward-looking statements. These forward-looking statements maygenerally be identified by the use of the words “may,” “will,” “expects,” “anticipates,”“believes,” “estimates,” and similar expressions, but the absence of thesewords or phrases does not necessarily mean that a statement is not forwardlooking. Forward looking statements involve a number of risks anduncertainties. Our actual results may differ materially from those described inor contemplated by any such forward-looking statement for a variety of reasons,including those risks identified in our most recent Annual Report on Form 10-Kand other periodic reports filed with the Securities and Exchange Commission,under the heading “Risk Factors” and otherwise. Consequently, the reader iscautioned to consider all forward-looking statements in light of the risks towhich they are subject.

 

We are not able toidentify or control all circumstances that could occur in the future that mayadversely affect our business and operating results. Without limiting the risksthat we describe in our periodic reports and elsewhere, among the risks thatcould lead to a materially adverse impact on our business or operating resultsare the following: termination or non-renewal of limited duration agreements orarrangements with our vendors and affinity partners which are typicallyterminable by either party upon several months notice; loss of significantcustomers or relationships, including affinity relationships; loss of customerseither directly or indirectly as a result of consolidation among large wirelessservice carriers and others within the wireless communications industry; thestrength of out customers’, vendors’ and affinity partners’ businesses;increasingly negative or prolonged adverse economic conditions, including thoseadversely affecting consumer confidence or consumer or business spending, orotherwise adversely affecting our vendors or customers, including their accessto capital or liquidity or our customers’ demand for or ability to fund or payfor the purchase of our products and services; our dependence on a relativelysmall number of suppliers and vendors, which could hamper our ability tomaintain appropriate inventory levels and meet customer demand; failure of ourinformation technology system or distribution system; technology changes in thewireless communications industry, which could lead to significant inventoryobsolescence and/or our inability to offer key products that our customersdemand; third-party freight carrier interruption; increased competition fromcompetitors, including manufacturers or national and regional distributors ofthe products we sell and the absence of significant barriers to entry whichcould result in pricing and other pressures on profitability and market share;our inability to access capital and obtain or retain financing as and whenneeded; transitional and other risks associated with acquisitions of companiesthat we may undertake in an effort to expand our business; the possibilitythat, 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 bedelayed in realizing or fail to realize anticipated revenues or anticipatedsavings; our inability to protect certain intellectual property, includingsystems and technologies on which we rely; and our inability to hire or retainfor any reason our key professionals, management and staff.

 

**Available Information**

 

Our Internet Website address is: www.tessco.com. We make available free of charge through ourWeb 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 orfurnished pursuant to Section 13 or 15(d) of the Exchange Act as soonas reasonably practicable after such documents are electronically filed with,or furnished to, the Securities and Exchange Commission.  Also available on our Web site is our Code ofBusiness Conduct and Ethics.

 

**Item3.  Quantitative and QualitativeDisclosures About Market Risk.**

 

Not Applicable.

 

###### **Item 4. Controls and Procedures.**

###### ** **

The Company’s Chief ExecutiveOfficer (CEO) and Chief Financial Officer (CFO) have evaluated theeffectiveness of the Company’s disclosure controls and procedures (as such termis defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended (Exchange Act)) as of the end of the periodcovered by this quarterly report. A control system, no matter how well designedand operated, can provide only reasonable, not absolute, assurance that thecontrol system’s objectives will be met. Based on the evaluation of thesecontrols and procedures required by Rules 13a-15(b) or 15d-15(b) ofthe Exchange Act, the Company’s management, including the CEO and CFO, haveconcluded that, as of the end of the period covered by this quarterly report,the Company’s disclosure controls and procedures were 

 

25

----

Table of Contents

 

effective to providereasonable assurance that information required to be disclosed by the Companyin reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms and to providereasonable assurance that such information is accumulated and communicated tothe Company’s management, including the Company’s CEO and CFO, as appropriateto allow timely decisions regarding required disclosure. During the periodcovered by this quarterly report, there have been no changes to the Company’sinternal control over financial reporting that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

**PART II.  OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

Lawsuits andclaims are filed against us from time to time in the ordinary course ofbusiness.  We do not believe that anylawsuits or claims currently pending against the Company, individually or inthe aggregate, are material, or will have a material adverse affect on ourfinancial condition or results of operations.

 

**Item1A.  Risk Factors.**

 

There have been nomaterial changes from the risk factors as previously disclosed in the Company’sAnnual Report on Form 10-K for the fiscal year ended March 30, 2008and as supplemented by the risk factor included in the Company’s QuarterlyReport on Form 10-Q for the fiscal quarter ended September 28, 2008.  Nevertheless, information that we havedisclosed or will disclose from time to time in our public filings (includingthis Quarterly Report on Form 10-Q and other periodic reports filed under theExchange Act) may provide additional data or information relative to ourpreviously disclosed risk factors.

 

###### **Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.**

###### ** **

The followingtable sets forth information with respect to purchases of TESSCO common stockby the Company or any affiliated purchasers during the third quarter of fiscalyear 2009.

 
| **Period (1)**                                    | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price  Paid per  Share** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs** | ** ** | **Maximum Number  of Shares that May  Yet Be Purchased  Under the Plans or  Programs (2)** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|
| September 29,  2008 through October 26, 2008 |       | 34,800                                       |       | $                                        | 11.00      |                                                                                                                             | 34,800     |                                                                                                                                         | 150,401    |   |
| October 27,  2008 through November 30, 2008  |       | 16,873                                       |       | 10.42                                    |       | 16,873                                                                                                                           |       | 133,528                                                                                                                                      |       |
| December 1,  2008 through December 28, 2008  |       | 19,458                                       |       | 10.13                                    |       | 19,458                                                                                                                           |       | 114,070                                                                                                                                      |       |
| Total                                                  |       | 71,131                                       |       | $                                        | 10.62      |                                                                                                                             | 71,131     |                                                                                                                                         | 114,070    |   |

 

----

(1)          Periods indicated are fiscal accountingmonths for the third quarter of fiscal year 2009.

(2)          Amounts are as of the end of the fiscalaccounting month or quarter, as applicable.

 

On April 28,2003, our Board of Directors announced a stock buyback program.  As of December 28, 2008, the Board ofDirectors has authorized the purchase of 2,395,567 shares of outstanding commonstock under the stock buyback program. During the third quarter of 2009, the Company repurchased 71,131 sharesof its common stock for approximately $0.8 million pursuant to thisprogram.  As of December 28, 2008,we had purchased an aggregate of 2,281,497 shares of our outstanding commonstock pursuant to this program for approximately $30.0 million, or an averageprice of $13.16 per share.  Accordingly,as of December 28, 2008, 114,070 shares remained available for repurchaseunder this program.  Shares may bepurchased from time to time under this program in the open market, by blockpurchase, or through negotiated transactions, or possibly other transactionsmanaged by broker-dealers.  No timetablehas been set for completion or expiration of the program.

 

OnJuly 1, 2008, separate from, and in addition to, our stock buybackprogram, we repurchased all 470,000 shares of our common stock held byBrightpoint in a privately negotiated transaction.  Pursuant to an agreement entered into betweenus and Brightpoint, we purchased Brightpoint’s share holdings, comprisingapproximately 9% of our total then 

 

26

----

Table of Contents

 

outstandingcommon stock, for $13.64 per share, or a total of $6,410,800.  The price per share was determined based onthe seven trading day trailing average closing price of our common stock on theNASDAQ Global Market determined as of the close of trading on June 30,2008. The purchase was funded through available cash and borrowings under ourrevolving credit facility.  Thistransaction does not affect the number of shares available for repurchase underour stock buyback program.

 

###### **Item 3. Defaults Upon Senior Securities.**

###### ** **

None.

 

###### **Item 4. Submission of Matters to a Vote of Security Holders.**

###### ** **

None.

 

###### **Item 5. Other Information.**

###### ** **

None.

 

###### ** **Item6.  Exhibits.

###### ** **

(a)                EXHIBITS:

 
| 10.1   |   | Second Modification  Agreement, made effective as of November 26, 2008, to Credit Agreement  dated as of May 31, 2007, by and among the Registrant and its primary  operating subsidiaries as borrowers, and SunTrust Bank and Wachovia Bank,  National Association, as lenders (incorporated herein by reference to  Exhibit 10.1 to the Current Report on Form 8-K filed by the  Registrant with the Securities and Exchange Commission on December 3,  2008). |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1.1 |   | Rule 15d-14(a) Certification  of Robert B. Barnhill, Jr., Chief Executive Officer.                                                                                                                                                                                                                                                                                                                                                                                         |
| 31.2.1 |   | Rule 15d-14(a) Certification  of David M. Young, Chief Financial Officer.                                                                                                                                                                                                                                                                                                                                                                                                       |
| 32.1.1 |   | Section 1350 Certification of Robert B.  Barnhill, Jr., Chief Executive Officer.                                                                                                                                                                                                                                                                                                                                                                                                |
| 32.2.1 |   | Section 1350 Certification of David M. Young,  Chief Financial Officer.                                                                                                                                                                                                                                                                                                                                                                                                              |

 

27

----

Table of Contents

 

**Signature**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 

|                          | TESSCO  TECHNOLOGIES INCORPORATED             |
|-------------------------------|-----------------------------------------------|
|                          |                                          |
|                          |                                          |
| Date: February 11,  2009 | By:                                           | /s/ David M. Young |
|                          | David  M. Young                               |
|                          | Chief Financial Officer                       |
|                          | (principal  financial and accounting officer) |

 

28

----