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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

#### **FORM 10-Q**

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

 

##### **Forthe quarterly period ended June 28, 2009**

 

**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**

 

# ***TESSCOTECHNOLOGIES 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)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes x No  ̈

 

Indicateby check mark whether the registrant submitted electronically and posted on itscorporate Website, if any, every Interactive Data File required to be submittedand posted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).  Yes  ̈ No  ̈

 

Indicate by check mark whether the registrant isa large accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

 
| Large accelerated filer  ̈ | Accelerated filer  ̈     |
|-------------------------------------|-----------------------------------|
|                                |                              |
| Non-accelerated filer  ̈   | Smaller reporting  company x |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o No x

 

The number of shares of the registrant’sCommon Stock, $0.01 par value per share, outstanding as of August 1, 2009,was 4,805,329.

 

 

 

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**TESSCO TECHNOLOGIES INCORPORATED**

**Index to Form 10-Q**

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

 

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

###### ** **

###### **Item 1. FinancialStatements.**

 

**TESSCOTECHNOLOGIES INCORPORATED**

**Unaudited Consolidated Balance Sheets**

 
| ** **                                       | ** ** | **June 28,  2009** | ** **  | **March 29,********2009** | ** ** |
|--------------------------------------------------|------------|-------------------------|-------------|--------------------------------|------------|
| ** **                                       | ** ** | ** **              | ** **  | ** **                     | ** ** |
| **ASSETS**                                       |       |                    |        |                           |       |
|                                             |       |                    |        |                           |       |
| Current assets:                                  |       |                    |        |                           |       |
| Cash and cash equivalents                        |       | $                       | 4,400,300   |                           | $          | 599,800 |   |
| Trade accounts receivable, net                   |       | 48,292,000              |        | 44,601,300                     |       |
| Product inventory, net                           |       | 40,929,200              |        | 36,540,400                     |       |
| Deferred tax assets                              |       | 4,366,700               |        | 4,366,700                      |       |
| Prepaid expenses and other current assets        |       | 2,163,900               |        | 2,168,500                      |       |
| Total current assets                             |       | 100,152,100             |        | 88,276,700                     |       |
|                                             |       |                    |        |                           |       |
| Property and equipment, net                      |       | 20,833,700              |        | 21,566,900                     |       |
| Goodwill, net                                    |       | 8,832,700               |        | 6,550,700                      |       |
| Other long-term assets                           |       | 2,038,600               |        | 2,258,300                      |       |
| Total assets                                     |       | $                       | 131,857,100 |                           | $          | 118,652,600 |   |
|                                             |       |                    |        |                           |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**    |       |                    |        |                           |       |
|                                             |       |                    |        |                           |       |
| Current liabilities:                             |       |                    |        |                           |       |
| Trade accounts payable                           |       | $                       | 50,675,700  |                           | $          | 40,481,600 |   |
| Payroll, benefits and taxes                      |       | 5,800,400               |        | 6,494,400                      |       |
| Income and sales tax liabilities                 |       | 4,293,400               |        | 2,908,400                      |       |
| Accrued expenses and other current liabilities   |       | 1,386,700               |        | 1,405,900                      |       |
| Current portion of long-term debt                |       | 384,300                 |        | 361,400                        |       |
| Total current liabilities                        |       | 62,540,500              |        | 51,651,700                     |       |
|                                             |       |                    |        |                           |       |
| Deferred tax liabilities                         |       | 2,416,000               |        | 2,416,000                      |       |
| Long-term debt, net of current portion           |       | 3,614,400               |        | 3,481,700                      |       |
| Other long-term liabilities                      |       | 958,200                 |        | 937,000                        |       |
| Total liabilities                                |       | 69,529,100              |        | 58,486,400                     |       |
|                                             |       |                    |        |                           |       |
| Shareholders’ equity:                       |       |                    |        |                           |       |
| Preferred stock                                  |       | —                  |        | —                         |       |
| Common stock                                     |       | 81,000                  |        | 80,100                         |       |
| Additional paid-in capital                       |       | 34,837,500              |        | 34,503,700                     |       |
| Treasury stock                                   |       | (42,257,500             | )           | (42,155,700                    | )          |
| Retained earnings                                |       | 69,793,000              |        | 67,880,900                     |       |
| Accumulated other comprehensive loss, net of tax |       | (126,000                | )           | (142,800                       | )          |
| Total shareholders’ equity                  |       | 62,328,000              |        | 60,166,200                     |       |
| Total liabilities and shareholders’ equity  |       | $                       | 131,857,100 |                           | $          | 118,652,600 |   |

 

Seeaccompanying notes.

 

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**TESSCO TECHNOLOGIES INCORPORATED**

**Unaudited Consolidated Statements of Income**

 
| ** **                                   | ** ** | **Three Months Ended** | ** **  |
|----------------------------------------------|------------|----------------------------------|-------------|
| ** **                                   | ** ** | **June 28, 2009**           | ** **  | **June 29, 2008** | ** ** |
|                                         |       |                             |        |   |   |
| Revenues                                     |       | $                                | 108,801,300 |   | $ | 122,068,300 |   |
| Cost of goods sold                           |       | 79,785,700                       |        | 91,055,400 |   |
| Gross profit                                 |       | 29,015,600                       |        | 31,012,900 |   |
| Selling, general and administrative expenses |       | 25,761,400                       |        | 27,494,600 |   |
| Income from operations                       |       | 3,254,200                        |        | 3,518,300 |   |
| Interest expense, net                        |       | 109,300                          |        | 136,800 |   |
| Income before provision for income taxes     |       | 3,144,900                        |        | 3,381,500 |   |
| Provision for income taxes                   |       | 1,232,800                        |        | 1,318,800 |   |
| Net income                                   |       | $                                | 1,912,100   |   | $ | 2,062,700 |   |
| Basic earnings per share                     |       | $                                | 0.39        |   | $ | 0.38 | * |
| Diluted earnings per share                   |       | $                                | 0.38        |   | $ | 0.37 | * |

 

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*Prior year basic and diluted earnings per share have been adjusted to show theeffects of adoption of FASB Staff Position No. 03-6-1, “DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities.” See Note 3 for further discussion.

 

See accompanying notes.

 

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**TESSCOTECHNOLOGIES INCORPORATED**

**Unaudited Consolidated Statements of Cash Flows**

 
| ** **                                                                                                        | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                        | ** ** | **June 28, 2009**           | ** ** | **June 29, 2008** | ** ** |
|                                                                                                              |       |                             |       |   |   |
| Cash flows from operating activities:                                                                             |       |                             |       |   |   |
| Net income                                                                                                        |       | $                                | 1,912,100  |   | $ | 2,062,700 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:                                |       |                             |       |   |   |
| Depreciation and amortization                                                                                     |       | 1,040,900                        |       | 1,098,900 |   |
| Non-cash stock compensation expense                                                                               |       | 555,500                          |       | 508,500 |   |
| Deferred income taxes and other                                                                                   |       | 242,000                          |       | 4,200 |   |
| Change in trade accounts receivable                                                                               |       | (3,690,700                       | )          | 4,490,700 |   |
| Change in product inventory                                                                                       |       | (4,388,800                       | )          | (980,800 | ) |
| Change in prepaid expenses and other current assets                                                               |       | 4,600                            |       | (131,600 | ) |
| Change in trade accounts payable                                                                                  |       | 10,294,100                       |       | (1,509,400 | ) |
| Change in payroll, benefits and taxes                                                                             |       | (694,000                         | )          | 2,888,300 |   |
| Change in income and sales tax liabilities                                                                        |       | 1,385,000                        |       | (442,300 | ) |
| Change in accrued expenses and other current  liabilities                                                         |       | (19,200                          | )          | 220,700 |   |
| Net cash provided by operating activities                                                                         |       | 6,641,500                        |       | 8,209,900 |   |
|                                                                                                              |       |                             |       |   |   |
| Cash flows from investing activities:                                                                             |       |                             |       |   |   |
| Purchases of property and equipment                                                                               |       | (292,000                         | )          | (350,400 | ) |
| Additional earn-out payments on acquired businesses                                                               |       | (2,382,000                       | )          | (1,309,000 | ) |
| Net cash used in investing activities                                                                             |       | (2,674,000                       | )          | (1,659,400 | ) |
|                                                                                                              |       |                             |       |   |   |
| Cash flows from financing activities:                                                                             |       |                             |       |   |   |
| Net repayments on revolving line of credit                                                                        |       | —                           |       | (3,353,500 | ) |
| Payments on long-term debt                                                                                        |       | (94,400                          | )          | (89,400 | ) |
| Proceeds from debt issuance                                                                                       |       | 250,000                          |       | — |   |
| Purchases of treasury stock and repurchases of stock  from  employees and directors for  minimum tax withholdings |       | (101,800                         | )          | (230,200 | ) |
| Excess tax (loss) benefit from stock-based  compensation                                                          |       | (220,800                         | )          | 54,200 |   |
| Net cash used in financing activities                                                                             |       | (167,000                         | )          | (3,618,900 | ) |
|                                                                                                              |       |                             |       |   |   |
| Net increase in cash and cash equivalents                                                                         |       | 3,800,500                        |       | 2,931,600 |   |
|                                                                                                              |       |                             |       |   |   |
| Cash and cash equivalents, beginning of period                                                                    |       | 599,800                          |       | 2,086,200 |   |
|                                                                                                              |       |                             |       |   |   |
| Cash and cash equivalents, end of period                                                                          |       | $                                | 4,400,300  |   | $ | 5,017,800 |   |

 

Seeaccompanying notes.

 

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**TESSCO TECHNOLOGIES INCORPORATED**

**Notes to Unaudited ConsolidatedFinancial Statements**

**June 28, 2009**

 

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

# * *

TESSCOTechnologies Incorporated, a Delaware corporation (TESSCO, we, or the Company),is a leading 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. Approximately97% of the Company’s sales are made to customers in the United States. TheCompany takes orders in several ways, including phone, fax, online and throughelectronic data interchange. Over 99% of the Company’s sales are made in UnitedStates Dollars.

 

In management’s opinion, the accompanying interimconsolidated financial statements of the Company include all adjustments,consisting only of normal, recurring adjustments, necessary for a fairpresentation of the Company’s financial position for the interim periodspresented. These statements are presented in accordance with the rules andregulations of the United States Securities and Exchange Commission (“SEC”).Certain information and footnote disclosures normally included in the Company’sannual financial statements have been omitted from these statements, aspermitted under the applicable rules and regulations. The results ofoperations presented in the accompanying interim consolidated financialstatements are not necessarily representative of operations for an entire year.The information included in this Form 10-Q should be read in conjunctionwith the consolidated financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the fiscal year ended March 29,2009.

 

# ***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 toinvestors’ requests for expanded information about the extent to whichcompanies measure assets and liabilities at fair value, the information used tomeasure fair value, and the effect of fair 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 useof fair value in any new circumstances. In February 2008, the FASBpartially 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 fiscal yearbeginning March 30, 2009. The Company adopted SFAS No. 157 for itsfinancial assets and liabilities effective as of March 31, 2008, andadopted SFAS No. 157 for non-financial assets and liabilities effective March 30,2009. The adoption of SFAS No. 157 did not have a material impact on theCompany’s consolidated financial statements. See Note 5 for additionaldisclosures.

 

In December 2007, the FASB issued SFAS No. 141(R),“Business Combinations,” which replaces SFAS No. 141. The standard retainsthe fundamental requirements of SFAS No. 141 that the acquisition methodof accounting (labeled the purchase method under SFAS No. 141) be used forall business combinations and that an acquirer be identified for each businesscombination. SFAS No. 141(R) requires the assets, liabilities,noncontrolling interests, certain acquired contingencies and contingentconsideration during a business combination to be measured at their fair valueas of the acquisition date. SFAS No. 141(R) is effective for fiscalyears beginning on or after December 15, 2008. The Company adopted SFAS No. 141(R) effectiveMarch 30, 2009 for any acquisitions made subsequent to that date. Theadoption of SFAS No. 141(R) did not impact the accounting foracquisitions made by the Company prior to March 30, 2009, however it willimpact the accounting treatment of all acquisitions made after such date.

 

In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities — an amendmentof FASB Statement No. 133.” Under SFAS No. 161, entities are requiredto provide enhanced disclosures about (a) how and why an entity usesderivative instruments, (b) how derivative instruments and related hedgeditems are accounted for under FASB Statement No. 133 and its relatedinterpretations, and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance and cashflows. The provisions of this statement are effective for periods beginningafter November 15, 2008, and both early application and comparative 

 

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disclosures are encouraged. The adoption of SFAS No. 161did not have a material impact on the Company’s consolidated financialstatements.

 

In April 2009, the FASB issued FSP No. 107-1and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSPNo. 107-1”). FSP No. 107-1 amends SFAS No. 107, “Disclosuresabout Fair Value of Financial Instruments” to extend the disclosurerequirements regarding the fair value of financial instruments to interimfinancial statements. FSP No. 107-1 is effective for interim reportingperiods ending after June 15, 2009, with early adoption permitted forperiods ending after March 15, 2009. The Company adopted FSP No. 107-1effective June 28, 2009. The adoption of FSP No 107-1 did not have amaterial impact on the Company’s interim consolidated financial statements. SeeNote 5 for additional disclosures.

 

In May 2009, the FASB issued SFAS No. 165,“Subsequent Events.” SFAS No. 165 provides guidance to establish generalstandards of accounting for and disclosures of events that occur after thebalance sheet date but before the financial statements are issued or areavailable to be issued. SFAS No. 165 requires disclosure of the datethrough which an entity has evaluated subsequent events and the basis for thatdate. SFAS No. 165 is effective for interim or annual financial periodsending after June 15, 2009. The adoption of SFAS No. 165 did not havea material impact on the Company’s consolidated financial statements. See Note12 for additional disclosures.

 

InJuly 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of GenerallyAccepted Accounting Principles – a replacement of FASB SFAS No. 162” (the “Codification”). Other thanresolving certain minor inconsistencies in current United States GenerallyAccepted Accounting Principles (“GAAP”), the Codification does not change GAAP,but is intended to make it easier to find and research GAAP applicable toparticular transactions or specific accounting issues. The Codification is anew structure which takes accounting pronouncements and organizes them byapproximately ninety accounting topics. The Codification will be the singlesource of authoritative nongovernmental U.S. GAAP. All guidance included in theCodification is authoritative, even guidance that comes from what used to be deemeda non-authoritative section of a standard. All non-grandfathered, non-SECaccounting literature not included in the Codification is non-authoritative.The Codification is effective for interim and annual periods ending after September 15,2009. The Company does not believe the adoption of the Codification will have amaterial impact on the Company’s consolidated financial statements.

 

# ***Note 3. Accounting Changes***

# * *

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).”This FSP provides that unvested share-based payment awards that containnon-forfeitable rights to dividends are participating securities and shall beincluded in the computation of earnings per share pursuant to the two-classmethod described in SFAS No. 128, “Earnings per Share.” The two-classmethod of computing earnings per share is an earnings allocation formula thatdetermines earnings per share for common stock and any participating securitiesaccording to dividends declared (whether paid or unpaid) and participationrights in undistributed earnings. Restricted stock of the Company of 105,000shares as of June 28, 2009 are considered participating securities sincethe award contains a non-forfeitable right to dividends irrespective of whetherthe stock ultimately vests. This FSP is effective for financial statementsissued for fiscal years beginning after December 15, 2008 and interimperiods within those years. Upon adoption, the Company retrospectively adjustedearnings per share data to conform to the provisions in the FSP. Accordingly,the Company adopted the provisions of FSP No. 03-6-1 effective March 30,2009 and computed earnings per share using the two-class method for all periodspresented. FSP No. 03-6-1 reduced full fiscal year 2009, 2008 and 2007diluted earnings per common share by $0.03, $0.02 and $0.01, respectively, andreduced first quarter diluted earnings per common share by $0.01 for fiscalyear 2009. See Note 6 for additional disclosures.

 

# ***Note 4. Stock Compensation***

# * *

TheCompany’s selling, general and administrative expenses for the three monthsended June 28, 2009 and June 29, 2008 includes $555,500 and $508,500,respectively, of non-cash stock compensation expense. Stock compensationexpense is primarily related to our Performance Stock Unit (PSU) Program. Inaddition, the Company recorded an excess tax (loss) benefit directly toshareholders’ equity of $(220,800) and $54,200, primarily related to the PSUswhich vested during the three months ended June 28, 2009 and June 29,2008, respectively.

 

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**PerformanceStock Units:**The following table summarizes the activity underthe Company’s PSU program for the first three months of fiscal year 2010:

 
| ** **                                                                         | ** ** | **Three Months Ended  June 28, 2009** | ** ** | **Weighted Average  Fair Value at Grant  Date** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------------|------------|
| Shares  available for issue under outstanding PSUs, non-vested beginning of period |       | 359,494                                    |       | $                                               | 12.10      |   |
| Granted                                                                            |       | 264,000                                    |       | 8.77                                            |       |
| Vested                                                                             |       | (94,529                                    | )          | 12.29                                           |       |
| Forfeited/cancelled                                                                |       | (75,880                                    | )          | 11.71                                           |       |
| Shares  available for issue under outstanding PSUs, non-vested end of period       |       | 453,085                                    |       | $                                               | 10.12      |   |

 

Of the 453,085 shares availablefor issuance under outstanding PSUs but not yet vested as of June 28,2009, 189,085 shares have been earned, and assuming the respective participantsremain employed by or associated with the Company on these dates, these shareswill vest and be issued ratably on or about May 1 of 2010, 2011 and 2012.

 

The PSUs cancelled during fiscal year2010 related to the fiscal year 2009 grant of PSUs, which had a 1-yearmeasurement period (fiscal year 2009). During that period, actual earnings pershare on a cumulative basis exceeded the threshold level, but did not reach thegoal level, and thus, the underlying shares not earned from those PSUs werecancelled. Per the provisions of the Second Amended and Restated 1994 Stock andIncentive Plan (the “1994 Plan”), the shares related to these PSUs were addedback to the 1994 Plan and became available for future issuance.

 

Duringfiscal year 2010, 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 264,000 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 haveonly one measurement year (fiscal year 2010), with any shares earned at the endof fiscal year 2010 to vest and be issued 25% on or about May 1 of each of2010, 2011, 2012 and 2013, provided that the respective participants remainemployed by or associated with the Company on each such date.

 

Ifthe maximum target of PSUs granted in fiscal year 2010 is assumed to be earned,total unrecognized compensation costs on these and all other earned butunvested PSU’s would be approximately $3.0 million as of June 28, 2009 andwould be expensed through fiscal year 2013.

 

**Stock Options:** In accordance with SFAS No. 123R, the fairvalue of the Company’s stock options has been determined using theBlack-Scholes-Merton option pricing model, based upon facts and assumptionsexisting at the date of grant. Outstanding stock options 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. This occurs without regard to subsequentchanges in stock price, volatility or interest rates over time, provided thatthe option remains outstanding. As of June 28, 2009, all outstanding stockoptions are fully vested. The following table summarizes the pertinent optioninformation for outstanding options for the three months ended June 28,2009:

 
| ** **                                  | ** ** | **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 fiscal year 2007, the Company granted 150,000shares of the Company’s common stock to its Chairman and Chief ExecutiveOfficer as a restricted stock award under the 1994 Plan. These shares vestratably over ten 

 

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fiscal years based on service, beginning on the lastday of fiscal year 2007 and ending on the last day of fiscal year 2016,subject, however, to the terms applicable to the award, including termsproviding for possible acceleration of vesting upon death, disability, changein control or certain other events. The weighted average fair value for theseshares at the grant date was $15.84. No other shares of restricted stock arecurrently issued as awards under the 1994 Plan. As of June 28, 2009,105,000 shares remain unvested and there was no activity related to theserestricted shares during the first quarter of fiscal year 2010. As of June 28,2009, there was approximately $1.6 million of total unrecognized compensationcosts related to restricted stock. Unrecognized compensation costs are expectedto be recognized ratably over a period of approximately seven years.

 

# ***Note 5. 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:

 

·                  Level 1: Quoted prices (unadjusted) in activemarkets for identical assets or liabilities.

·                  Level 2: Inputs other than quoted pricesincluded within Level 1 that are observable for the asset or liability, eitherdirectly or indirectly. These include quoted prices for similar assets orliabilities in active markets, and quoted prices for identical or similar assetsor liabilities in markets that are not active.

·                  Level 3: Unobservable inputs for the asset orliability that reflect the reporting entity’s own assumptions about the inputsused in pricing the asset or liability.

 

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

 
| ** **                                | ** ** | **Balance at  June 28, 2009** | ** ** | **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 |       | $                                  | (126,000   | )                                                                      | $          | —                                                      |       | $                                                      | (126,000   | ) | $ | — |   |
| Total  assets at fair value               |       | $                                  | (126,000   | )                                                                      | $          | —                                                      |       | $                                                      | (126,000   | ) | $ | — |   |

 

On October 1, 2005, the Company entered into areceive variable/pay fixed interest rate swap on a total notional amount of$4.2 million with Wachovia Bank, National Association to avoid the risksassociated with fluctuating interest rates on the Company’s existing term loan,which bears interest at a floating rate of LIBOR plus 1.75%, and to eliminatethe variability in the cash outflow for interest payments. The interest rateswap agreement locks the interest rate for the outstanding principal balance ofthe loan at 6.38% through June 30, 2011. The Company anticipates retainingat least some portion of the interest rate swap agreement throughout the periodof the term loan. As such, no amount of the loss on the agreement, currentlyrecorded in other comprehensive income, has been, or is anticipated to bereclassified into earnings. There was no payment due or received at inceptionof the swap. No hedge ineffectiveness will be recognized as the interest rateswaps’ provisions match the applicable provisions of the term bank loan. Thiscash flow hedge qualified for hedge accounting using the short-cut method sincethe swap terms match the critical terms of the hedged debt. The Company’sfair value of its interest rate swap is derived from valuation models commonlyused for derivatives. 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.

 

Thecarrying amounts of cash and cash equivalents, trade accounts receivable,product inventory, trade accounts payable, accrued expenses and other currentliabilities approximate their fair values as of June 28, 2009 and March 29,2009 due to their short term nature.

 

Fairvalue of long-term debt, calculated using current interest rates and futureprincipal payments, as of June 28, 2009 and March 29, 2009 isestimated as follows:

 

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| ** **                                       | ** ** | **June 28, 2009** | ** ** | **March 29, 2009** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                       | ** ** | **Carrying  Amount**   | ** ** | **Fair********Value**   | ** ** | **Carrying  Amount** | ** ** | **Fair********Value** | ** ** |
| Note payable to a Bank                           |       | $                      | 3,393,800  |                    | $          | 3,219,800 |   | $ | 3,450,000 |   | $ | 3,228,500 |   |
| Note payable to the Maryland EconomicDevelopment |       | $                      | 358,700    |                    | $          | 344,200 |   | $ | 393,100 |   | $ | 391,100 |   |
| Note payable to Baltimore County                 |       | $                      | 246,200    |                    | $          | 212,400 |   | $ | — |   | $ | — |   |

 

# ***Note 6. Earnings Per Share***

# * *

Effective March 30, 2009, the Company adoptedFSP 03-6-1, “Determining Whether Instruments Granted in Share-Based PaymentTransactions are Participating Securities,” which required it to use thetwo-class method to calculate earnings per share. Under the two-class method,earnings per common share are computed by dividing the sum of the distributedearnings to common shareholders and undistributed earnings allocated to commonshareholders by the weighted average number of common shares outstanding forthe period. In applying the two-class method, undistributed earnings areallocated to both common shares and participating securities based on theweighted average shares outstanding during the period.

 

The following table presents the calculation ofbasic and diluted earnings per common share:

 
| ** **                                                                       | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **Amounts in thousands, expect per share amounts** | ** ** | **June 28, 2009**           | ** ** | **June 29, 2008** | ** ** |
| Earnings per share -  Basic:                                                     |       |                             |       |   |   |
| Net earnings                                                                     |       | $                                | 1,912      |   | $ | 2,063 |   |
| Less: Distributed and undistributed earnings  allocated to nonvested stock       |       | (41                              | )          | (46 | ) |
| Earnings available to common shareholders - Basic                                |       | $                                | 1,871      |   | $ | 2,017 |   |
|                                                                             |       |                             |       |   |   |
| Weighted average common shares outstanding - Basic                               |       | 4,777                            |       | 5,271 |   |
|                                                                             |       |                             |       |   |   |
| Earnings per common share - Basic                                                |       | $                                | 0.39       |   | $ | 0.38 |   |
|                                                                             |       |                             |       |   |   |
| Earnings per share -  Diluted:                                                   |       |                             |       |   |   |
| Net earnings                                                                     |       | $                                | 1,912      |   | $ | 2,063 |   |
| Less: Distributed and undistributed earnings  allocated to nonvested stock       |       | (40                              | )          | (45 | ) |
| Earnings available to common shareholders -  Diluted                             |       | $                                | 1,872      |   | $ | 2,018 |   |
|                                                                             |       |                             |       |   |   |
| Weighted average common shares outstanding - Basic                               |       | 4,777                            |       | 5,271 |   |
| Effect of dilutive options                                                       |       | 144                              |       | 119 |   |
| Weighted average common  shares outstanding - Diluted                            |       | 4,921                            |       | 5,390 |   |
|                                                                             |       |                             |       |   |   |
| Earnings per common share - Diluted                                              |       | $                                | 0.38       |   | $ | 0.37 |   |
|                                                                             |       |                             |       |   |   |
| Anti-dilutive equity awards not included above                                   |       | 45,000                           |       | — |   |

 

# ***Note 7. Business Segments***

# * *

The Company evaluates revenue, gross profit andinventory in three business segments: (1) Network infrastructureproducts are used to build, repair and upgrade wireless telecommunications,computing and Internet networks. Products include base station antennas, cableand transmission lines, fixed and mobile broadband equipment, wireless localarea network (WLAN) products, wireless networking, filtering systems, smalltowers, lightning protection devices, connectors, security and surveillanceproducts, power systems and miscellaneous hardware. Our network infrastructureservice offering includes connector installation, custom jumper assembly,filter product tuning, site kitting, logistics integration and wireless networktraining. (2) Mobile devices and accessory products include cellular phoneand data device accessories such as replacement batteries, cases, speakers,mobile amplifiers, power supplies, headsets, mounts, car antennas, musicaccessories and data and memory cards as well as two-way radios and relatedaccessories. Retail 

 

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merchandisingdisplays, promotional programs, customized order fulfillment services andaffinity-marketing programs, including providing outsourced call centers andprivate label Internet sites, complement our mobile devices and accessoryproduct offering. (3) Installation, test and maintenance products are usedto install, tune, maintain and repair wireless communications equipment.Products include sophisticated analysis equipment and various frequency-,voltage- and power-measuring devices, as well as an assortment of tools,hardware, GPS, safety and replacement and component parts and supplies requiredby service technicians. Within themobile devices and accessories line of business, the Company sells to bothcommercial and consumer markets. The network infrastructureand installation, test and maintenance lines of business sell primarily tocommercial markets. The Company also regularly reviews its results ofoperations in three commercial customer categories and the consumer customercategory, 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. Resellers include dealers and resellers that sell,install and/or service cellular telephone, wireless networking, broadband and two-way radiocommunications equipment primarily for the enterprise market, and to a lesserextent, the consumer market. These resellers include local and nationalvalue-added resellers and retailers, as well as sales and installation centersoperated by cellular and paging carriers.

 

·                  Commercial Self-Maintained Users and Governments. Self-maintained user (SMU) and governmentcustomers include commercial entities such as major utilities andtransportation companies, federal agencies and state and local governments.

 

·                  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 segmentoperations develop their product offering, pricing and strategies, which arecollaborative with one another and the centralized sales and marketingfunction. Therefore, the Company does not segregate assets, other thaninventory, for internal reporting, evaluating performance or allocatingcapital. In addition, the Company has allocated all goodwill and indefinitelived intangible assets to the applicable segments (and reporting units withinsegments, where applicable) for purposes of its annual impairment tests. TheCompany’s goodwill at June 28, 2009 relates to acquisitions within itsNetwork Infrastructure line of business. Product delivery revenue and certaincost of sales expenses have been allocated to each segment based on apercentage of revenues and/or gross profit, as applicable.

 

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Segmentactivity for the first quarter of fiscal years 2010 and 2009 is as follows:

 
| **(Amounts in thousands)**          | ** ** | **Network  Infrastructure** | ** ** | **Mobile Devices  and Accessories** | ** ** | **Installation, Test  and Maintenance** | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------|------------|-----------|------------|
| **Fiscal Quarter ended June 28, 2009**   |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial  Revenues:                         |       |                        |       |                                          |       |                                              |       |      |       |
| Public  Carriers and Network Operators        |       | $                           | 10,550     |                                          | $          | 467                                               |       | $         | 2,716      |   | $ | 13,733 |   |
| Resellers                                     |       | 16,791                      |       | 46,624                                        |       | 1,881                                             |       | 65,296    |       |
| SMUs  and Governments                         |       | 12,448                      |       | 3,234                                         |       | 10,859                                            |       | 26,541    |       |
| Total  Commercial Revenues                    |       | 39,789                      |       | 50,325                                        |       | 15,456                                            |       | 105,570   |       |
| Consumer  Revenues                            |       | —                      |       | 3,231                                         |       | —                                            |       | 3,231     |       |
| Total  Revenues                               |       | $                           | 39,789     |                                          | $          | 53,556                                            |       | $         | 15,456     |   | $ | 108,801 |   |
|                                          |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial  Gross Profit:                     |       |                        |       |                                          |       |                                              |       |      |       |
| Public  Carriers and Network Operators        |       | $                           | 2,679      |                                          | $          | 122                                               |       | $         | 676        |   | $ | 3,477 |   |
| Resellers                                     |       | 4,912                       |       | 12,324                                        |       | 470                                               |       | 17,706    |       |
| SMUs  and Governments                         |       | 3,572                       |       | 977                                           |       | 2,331                                             |       | 6,880     |       |
| Total  Commercial Gross Profit                |       | 11,163                      |       | 13,423                                        |       | 3,477                                             |       | 28,063    |       |
| Consumer  Gross Profit                        |       | —                      |       | 953                                           |       | —                                            |       | 953       |       |
| Total  Gross Profit                           |       | $                           | 11,163     |                                          | $          | 14,376                                            |       | $         | 3,477      |   | $ | 29,016 |   |
|                                          |       |                        |       |                                          |       |                                              |       |      |       |
| Selling,  general and administrative expenses |       |                        |       |                                          |       |                                              |       | 25,762    |       |
| Income  from operations                       |       |                        |       |                                          |       |                                              |       | 3,254     |       |
| Interest  expense, net                        |       |                        |       |                                          |       |                                              |       | 109       |       |
| Income  before provision for income taxes     |       |                        |       |                                          |       |                                              |       | 3,145     |       |
| Provision  for income taxes                   |       |                        |       |                                          |       |                                              |       | 1,233     |       |
| Net  income                                   |       |                        |       |                                          |       |                                              |       | $         | 1,912      |   |
|                                          |       |                        |       |                                          |       |                                              |       |      |       |
| Product  Inventory                            |       | $                           | 19,470     |                                          | $          | 17,157                                            |       | $         | 4,302      |   | $ | 40,929 |   |
|                                          |       |                        |       |                                          |       |                                              |       |      |       |
| **Fiscal Quarter ended June 29, 2008**   |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial  Revenues:                         |       |                        |       |                                          |       |                                              |       |      |       |
| Public  Carriers and Network Operators        |       | $                           | 11,542     |                                          | $          | 684                                               |       | $         | 3,660      |   | $ | 15,886 |   |
| Resellers                                     |       | 18,550                      |       | 50,794                                        |       | 2,718                                             |       | 72,062    |       |
| SMUs  and Governments                         |       | 12,856                      |       | 3,812                                         |       | 14,787                                            |       | 31,455    |       |
| Total  Commercial Revenues                    |       | 42,948                      |       | 55,290                                        |       | 21,165                                            |       | 119,403   |       |
| Consumer  Revenues                            |       | —                      |       | 2,665                                         |       | —                                            |       | 2,665     |       |
| Total  Revenues                               |       | $                           | 42,948     |                                          | $          | 57,955                                            |       | $         | 21,165     |   | $ | 122,068 |   |
|                                          |       |                        |       |                                          |       |                                              |       |      |       |
| Commercial  Gross Profit:                     |       |                        |       |                                          |       |                                              |       |      |       |
| Public  Carriers and Network Operators        |       | $                           | 3,060      |                                          | $          | 206                                               |       | $         | 898        |   | $ | 4,164 |   |
| Resellers                                     |       | 4,986                       |       | 12,112                                        |       | 754                                               |       | 17,852    |       |
| SMUs  and Governments                         |       | 3,635                       |       | 1,275                                         |       | 3,089                                             |       | 7,999     |       |
| Total  Commercial Gross Profit                |       | 11,681                      |       | 13,593                                        |       | 4,741                                             |       | 30,015    |       |
| Consumer  Gross Profit                        |       | —                      |       | 998                                           |       | —                                            |       | 998       |       |
| Total  Gross Profit                           |       | $                           | 11,681     |                                          | $          | 14,591                                            |       | $         | 4,741      |   | $ | 31,013 |   |
|                                          |       |                        |       |                                          |       |                                              |       |      |       |
| Selling,  general and administrative expenses |       |                        |       |                                          |       |                                              |       | 27,494    |       |
| Income  from operations                       |       |                        |       |                                          |       |                                              |       | 3,519     |       |
| Interest  expense, net                        |       |                        |       |                                          |       |                                              |       | 137       |       |
| Income  before provision for income taxes     |       |                        |       |                                          |       |                                              |       | 3,382     |       |
| Provision  for income taxes                   |       |                        |       |                                          |       |                                              |       | 1,319     |       |
| Net  income                                   |       |                        |       |                                          |       |                                              |       | $         | 2,063      |   |
|                                          |       |                        |       |                                          |       |                                              |       |      |       |
| Product  Inventory                            |       | $                           | 24,129     |                                          | $          | 21,049                                            |       | $         | 4,860      |   | $ | 50,038 |   |

 

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# ***Note 8. Comprehensive Income***

# * *

The components of totalcomprehensive income were as follows:

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **June 28, 2009** | ** ** | **June 29, 2008** | ** ** |
|                                              |       |                   |       |   |   |
| Net Income                                        |       | $                      | 1,912,100  |   | $ | 2,062,700 |   |
| Change in value of interest rate swap, net of tax |       | 16,800                 |       | 61,000 |   |
| Total comprehensive income                        |       | $                      | 1,928,900  |   | $ | 2,123,700 |   |

 

# ***Note 9. Long-Term Debt***

# * *

On March 31, 2009, the Company entered into a term loanwith the Baltimore County Economic Development Revolving Loan Fund for anaggregate principal amount of $250,000. The term loan is payable in equalmonthly installments of principal and interest of $2,300, with the balance dueat maturity, April 1, 2019. The term loan bears interest at 2.00% perannum and is secured by a subordinate position on Company-owned real propertylocated in Hunt Valley, Maryland.

 

# ***Note 10. Stock Buyback***

# * *

On April 28, 2003,the Company’s Board of Directors approved a stock buyback program. As of June 28,2009, the Board of Directors had authorized the purchase of up to 2,395,567shares of outstanding common stock under the stock buyback program.Shares may be purchased from time to timein the open market, by block purchase, or through negotiated transactions, orpossibly other transactions managed by broker-dealers. No time limit has beenset for completion or expiration of the program. As of June 28, 2009, theCompany had purchased 2,311,128 shares under the stock buyback program forapproximately $30.3 million, or an average of $13.12 per share. Of the totalshares repurchased under the stock buyback program, no shares were repurchasedin the first three months of fiscal year 2010. As of June 28, 2009, 84,439shares remained 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 betweenthe Company and Brightpoint, the Company purchased Brightpoint’s shareholdings, comprising approximately 9% of the Company’s total then outstandingcommon stock, for $13.64 per share, or a total of $6,410,800. The price pershare was determined based on the seven trading day trailing average closingprice of the Company’s common stock on the NASDAQ Global Market determined asof the close of trading on June 30, 2008. The purchase price per shareapproximated the price of the Company’s common stock on the transaction date.The purchase was funded through available cash and borrowings under the Company’sunsecured revolving line of credit facility. This transaction was not madeunder, nor does it affect the number of shares available for repurchase under,the Company’s stock buyback program discussed above.

 

The Company alsowithholds shares from its employees and directors, at their request, equal tothe minimum federal and state tax withholdings related to vested performancestock units and restricted stock awards. For the three months ended June 28,2009 and June 29, 2008 the allocated value of the shares withheld totaled$101,800 and $230,200, respectively.

 

# ***Note 11. Customer Concentration***

# * *

TheCompany’s future results could be negatively impacted by the loss of certaincustomer and/or vendor relationships. For the fiscal quarters ended June 28,2009 and June 29, 2008, sales of products to the Company’s top customerrelationship, AT&T Mobility, accounted for 22% and 20% of total revenues, respectively.

 

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# ***Note 12. Subsequent Events***

 

The Company has evaluated all subsequent events from the fiscal quarterended June 28, 2009 through August 12, 2009, the date the financialstatements were issued.

 

On July 23, 2009, the Company and itsprimary operating subsidiaries, as borrowers, executed and delivered a ThirdModification Agreement (the “Third Modification Agreement”), dated as of July 22,2009, with SunTrust Bank and Wachovia Bank, National Association, amending theCredit Agreement and related promissory note for the Company’s existingunsecured revolving credit facility.

 

Pursuant to and in connection with the ThirdAmendment, the maximum available principal amount under the unsecured revolvingcredit facility was reduced to $35 million from $50 million, and the term of therevolving credit facility, as so modified, was extended to May 31,2012.  The Third Modification Agreement also provides for the modificationof certain financial covenants applicable to the borrowers on a going forwardbasis, including the “tangible net worth” and “maximum funded debt to EBITDA”covenants.  In addition, the amount of allowable dividend payments underthe Credit Facility was increased from $2.0 million to $2.5 million in any 12month period, assuming continued compliance with the otherwise applicableterms.

 

Pursuant to the relevant documents, the financial covenants included inthe Credit Agreement for the unsecured revolving credit facility are alsoapplicable to the Company’s existing Term Loan with the same lenders, having anoriginal principal amount of $5.5 million. Accordingly, the Third ModificationAgreement also has the effect of amending the financial covenants applicable tothe Term Loan.

 

On July 28, 2009, the Company announced that its Board ofDirectors determined to commence a dividend program and has declared an initialquarterly cash dividend of ten cents ($0.10) per share of common stock, parvalue $0.01 per share, of the Company, payable on August 26, 2009, toshareholders of record as of August 12, 2009. Any future declaration ofdividends and the establishment of any corresponding record and payment datesremains subject to further determination from time to time by the Board ofDirectors.

 

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**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 29, 2009.

 

**Business Overview and Environment**

 

TESSCOTechnologies Incorporated (TESSCO, we, 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-building systems.Although we sell products to customers in over 100 countries, approximately 97%of our sales are made to customers in the United States. We have operations andoffice facilities in Hunt Valley, Maryland, Reno, Nevada and San Antonio,Texas.

 

Our first quarterrevenues decreased by 10.9% compared to the first quarter of last year. Thisdecrease was driven by a decline in each of our commercial lines of business.Gross profits also declined in each of our commercial lines of business. Thisoverall decrease in gross profit, partially offset by a decrease in operatingexpenses, resulted in a 7.3% decline in net income but a 2.7% increase indiluted earnings per share over the prior-year quarter. The increase in dilutedearnings per share was driven by a decrease in outstanding shares as a resultof our stock buyback program and a large share repurchase made through aprivate transaction during the second quarter of fiscal year 2009.

 

Despitethe unfavorable comparables to last year’s first quarter, we experienced growthin both revenues and gross profits as compared with the prior year fourthquarter. Revenues and gross profits had sequential growth of 10.8% and 6.1%,respectively. Net income and diluted earnings per share increased 143.5% and137.5%, respectively. While the current global economy is still having anegative affect on our business (as further discussed below), we have been ablethus far to successfully navigate through a difficult environment to achievethese results.

 

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 currencyvalues worldwide, significant decreases in consumer confidence and consumer andbusiness spending, rising unemployment and concerns that the worldwide economymay enter into a prolonged recessionary period — may materially adverselyaffect our customers’ access to capital or willingness to spend capital on ourproducts, and/or their levels of cash liquidity with which to pay for ourproducts. During the first quarter, we saw negative affects of the currentglobal financial crisis, including a decline in our average number of monthlybuying customers and in the average dollars purchased for each buying customeras compared to the corresponding prior year quarter. We expect the economiccrisis to continue to have an impact on our operating results during the secondquarter of the fiscal year, especially in our retail and public carriers andnetwork operators businesses. In addition, the current global financial crisismay materially adversely affect our suppliers’ access to capital and liquidity,which may in turn adversely impact their ability to maintain inventories,production levels, and/or product quality, or cause them to raise prices orlower production levels, or result in their ceasing operation. The impact ofthe crisis on our liquidity is further discussed below under the heading“Liquidity and Capital Resources.”

 

Thewireless communications distribution industry is competitive and fragmented,and is comprised of several national distributors. In addition, manymanufacturers sell direct. Barriers to entry for distributors are relativelylow, particularly in the mobile devices and accessories market, and the risk ofnew competitors entering the market is high. Consolidation of larger wirelesscarriers has and will most likely continue to impact our current and potentialcustomer base. In addition, the agreements or arrangements with our customersor vendors looking to us for product and supply chain solutions are typicallyof limited duration and are terminable by either party upon several months orotherwise short notice. Our ability to maintain these relationships is subjectto competitive pressures and challenges. We believe, however, that our strengthin service, the breadth and depth of our product offering, our informationtechnology system, and our large customer base and purchasing relationshipswith approximately 360 manufacturers, provide us with a significant competitiveadvantage over new entrants to the market.

 

Effective March 30,2009, we retrospectively adopted Financial Accounting Standards Board (“FASB”)Staff Position No. 03-6-1, “Determining Whether Instruments Granted inShare-Based Payment Transactions Are Participating Securities.” See Note 3 tothe consolidated financial statements for a discussion of the impact of thechange in accounting standards.

 

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**Resultsof Operations**

 

The followingtable summarizes the unaudited results of our operations for the fiscalquarters ended June 28, 2009 and June 29, 2008:

 
| ** **                                                                      | ** ** | **Three Months Ended**      | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **(Amounts in thousands, except per share data)** | ** ** | **June 28, 2009** | ** ** | **June 29, 2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Commercial Revenues                                                             |       |                        |       |   |   |   |   |   |   |
| Network Infrastructure:                                                         |       |                        |       |   |   |   |   |   |   |
| Public Carriers and  Network Operators                                          |       | $                           | 10,550     |   | $ | 11,542 |   | $ | (992 | ) | (8.6 | )% |
| Resellers                                                                       |       | 16,791                      |       | 18,550 |   | (1,759 | ) | (9.5 | )% |
| SMUs and Governments                                                            |       | 12,448                      |       | 12,856 |   | (408 | ) | (3.2 | )% |
| Total Network  Infrastructure                                                   |       | 39,789                      |       | 42,948 |   | (3,159 | ) | (7.4 | )% |
| Mobile Devices and  Accessories:                                                |       |                        |       |   |   |   |   |   |   |
| Public Carriers and  Network Operators                                          |       | 467                         |       | 684 |   | (217 | ) | (31.7 | )% |
| Resellers                                                                       |       | 46,624                      |       | 50,794 |   | (4,170 | ) | (8.2 | )% |
| SMUs and Governments                                                            |       | 3,234                       |       | 3,812 |   | (578 | ) | (15.2 | )% |
| Total Mobile Devices  and Accessories                                           |       | 50,325                      |       | 55,290 |   | (4,965 | ) | (9.0 | )% |
| Installation, Test and  Maintenance:                                            |       |                        |       |   |   |   |   |   |   |
| Public Carriers and Network  Operators                                          |       | 2,716                       |       | 3,660 |   | (944 | ) | (25.8 | )% |
| Resellers                                                                       |       | 1,881                       |       | 2,718 |   | (837 | ) | (30.8 | )% |
| SMUs and Governments                                                            |       | 10,859                      |       | 14,787 |   | (3,928 | ) | (26.6 | )% |
| Total Installation,  Test and Maintenance                                       |       | 15,456                      |       | 21,165 |   | (5,709 | ) | (27.0 | )% |
| Total Commercial  Revenues                                                      |       | 105,570                     |       | 119,403 |   | (13,833 | ) | (11.6 | )% |
| Consumer Revenues -  Mobile Devices and Accessories                             |       | 3,231                       |       | 2,665 |   | 566 |   | 21.2 | % |
| Total Revenues                                                                  |       | $                           | 108,801    |   | $ | 122,068 |   | $ | (13,267 | ) | (10.9 | )% |
|                                                                            |       |                        |       |   |   |   |   |   |   |
| Commercial Gross Profit                                                         |       |                        |       |   |   |   |   |   |   |
| Network Infrastructure:                                                         |       |                        |       |   |   |   |   |   |   |
| Public Carriers and  Network Operators                                          |       | $                           | 2,679      |   | $ | 3,060 |   | $ | (381 | ) | (12.5 | )% |
| Resellers                                                                       |       | 4,912                       |       | 4,986 |   | (74 | ) | (1.5 | )% |
| SMUs and Governments                                                            |       | 3,572                       |       | 3,635 |   | (63 | ) | (1.7 | )% |
| Total Network  Infrastructure                                                   |       | 11,163                      |       | 11,681 |   | (518 | ) | (4.4 | )% |
| Mobile Devices and  Accessories:                                                |       |                        |       |   |   |   |   |   |   |
| Public Carriers and  Network Operators                                          |       | 122                         |       | 206 |   | (84 | ) | (40.8 | )% |
| Resellers                                                                       |       | 12,324                      |       | 12,112 |   | 212 |   | 1.8 | % |
| SMUs and Governments                                                            |       | 977                         |       | 1,275 |   | (298 | ) | (23.4 | )% |
| Total Mobile Devices  and Accessories                                           |       | 13,423                      |       | 13,593 |   | (170 | ) | (1.3 | )% |
| Installation, Test and  Maintenance:                                            |       |                        |       |   |   |   |   |   |   |
| Public Carriers and  Network Operators                                          |       | 676                         |       | 898 |   | (222 | ) | (24.7 | )% |
| Resellers                                                                       |       | 470                         |       | 754 |   | (284 | ) | (37.7 | )% |
| SMUs and Governments                                                            |       | 2,331                       |       | 3,089 |   | (758 | ) | (24.5 | )% |
| Total Installation,  Test and Maintenance                                       |       | 3,477                       |       | 4,741 |   | (1,264 | ) | (26.7 | )% |
| Total Commercial Gross  Profit                                                  |       | 28,063                      |       | 30,015 |   | (1,952 | ) | (6.5 | )% |
| Consumer Gross Profit -  Mobile Devices and Accessories                         |       | 953                         |       | 998 |   | (45 | ) | (4.5 | )% |
| Total Gross Profit                                                              |       | 29,016                      |       | 31,013 |   | (1,997 | ) | (6.4 | )% |
|                                                                            |       |                        |       |   |   |   |   |   |   |
| Selling, general and  administrative expenses                                   |       | 25,762                      |       | 27,494 |   | (1,732 | ) | (6.3 | )% |
| Income from operations                                                          |       | 3,254                       |       | 3,519 |   | (265 | ) | (7.5 | )% |
| Interest expense, net                                                           |       | 109                         |       | 137 |   | (28 | ) | (20.4 | )% |
| Income before provision  for income taxes                                       |       | 3,145                       |       | 3,382 |   | (237 | ) | (7.0 | )% |
| Provision for income  taxes                                                     |       | 1,233                       |       | 1,319 |   | (86 | ) | (6.5 | )% |
| Net income                                                                      |       | $                           | 1,912      |   | $ | 2,063 |   | $ | (151 | ) | (7.3 | )% |
| Diluted earnings per  share                                                     |       | $                           | 0.38       |   | $ | 0.37 |   | $ | 0.01 |   | 2.7 | % |

 

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###### **First Quarter of Fiscal Year 2010 Compared withFirst Quarter of Fiscal Year 2009**

 

**Revenues.**Revenues for thefirst quarter of fiscal year 2010 decreased 10.9% as compared with the firstquarter of fiscal year 2009, primarily due to a 11.6% decrease in commercialrevenues, partially offset by a 21.2% increase in consumer revenues. Salesdecreased across all commercial lines of business.

 

Networkinfrastructure sales decreased 7.4% as compared with the first quarter offiscal year 2009, as a result of lower sales of broadband products to resellersand self-maintained users, but were partially offset by increased broadbandsales to public carriers and network operators. Sales of Radio Frequencypropagation products to public carriers and network operators and resellersdeclined significantly, but were partially offset by increased sales toself-maintained users.

 

Sales in themobile devices and accessories line of business decreased 7.6% in the firstquarter of fiscal year 2010, as compared with the same period last year. Thedecrease was due to a 9.0% decrease in commercial sales, partially offset by a21.2% increase in consumer sales. The decrease in commercial revenues formobile devices and accessories, which are sold primarily to resellers, was primarilydue to decreased sales to smaller resellers and users. Sales of mobile devicesand accessories to public carriers and network operators and SMUs andgovernments also decreased.

 

Revenues from ourinstallation, test and maintenance line of business decreased 27.0% from thecorresponding prior-year quarter, primarily due to a decline in sales of repairparts related to our major repair components relationship with Nokia, as wellas decreased sales of test equipment, tools and supply products across all ofour market categories. In January 2009, we extended our componentsrelationship with Nokia through December 2010. As part of this extension,Nokia now plays a larger, and we a smaller, role in servicing a group of largercustomers. We continue to earn fees from Nokia to fulfill product to theselarger customers, but as a result of our reduced role in these transactions, wereceive a smaller fee and we account for these sales on a net basis. Wecontinue to manage the complete supply chain as primary obligor for smallercustomers so we continue to record sales to these smaller customers on a grossbasis. Because of the evolution of our relationship with Nokia, it has becomeless material to our consolidated financial statements, and we expect that trendto continue.

 

**GrossProfit.**Grossprofit for the first quarter of fiscal year 2010 decreased 6.4% as comparedwith the first quarter of fiscal year 2009. Total commercial gross profitdecreased 6.5%, while consumer gross profit decreased 4.5%. Gross profit marginincreased to 26.7% in the first quarter of fiscal year 2010 from 25.4% in firstquarter of fiscal year 2009. Gross profit margin in our network infrastructuresegment increased from 27.2% in the first quarter of fiscal year 2009 to 28.1%in the first quarter of fiscal year 2010. This increase in gross profit marginwas a result of changes in product mix. Gross profit margin in our mobiledevices and accessories segment increased to 26.8% in the first quarter of thisfiscal year from 25.2% in the first quarter of last fiscal year. This increasewas primarily attributable to the commercial gross profit margin for our mobiledevices and accessories, which increased to 26.7% in the first quarter offiscal year 2010 from 24.6% for the first quarter of fiscal year 2009,principally due to product mix in sales to a large tier-one carrier and otherretail customers. Consumer gross profit margin for our mobile devices andaccessories decreased to 29.5% in the first quarter of this fiscal year from37.4% for the first quarter of last fiscal year. Gross profit margin in ourinstallation, test and maintenance line of business increased from 22.4% in thefirst quarter of fiscal year 2009 to 22.5% in the first quarter of fiscal year2010. Generally, our gross margins by product within these segments have beensustained, except as noted above, and generally these variations are related tosales mix within the segment product offerings. We account for inventory at thelower of cost or market, and as a result, write-offs/write-downs occur due todamage, 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, and accordingly the factors, applicable toeach affinity relationship often differ. Among these factors are the strengthof the customer’s or vendor’s business, the supply and demand for the productor service, including price stability, changing customer or vendorrequirements, and our ability to support the customer or vendor and tocontinually demonstrate that we can improve the way they do business. Inaddition, the agreements or arrangements on which our customer and vendorrelationships are based are typically of limited duration, and are terminableby either party upon several months or otherwise relatively short notice. Ourcustomer relationships could also be affected by wireless carrier consolidationor the global financial crisis.

 

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As total revenuesand gross profits from larger customer and vendor relationships, including AT&T,increase, we occasionally experience and expect to continue to experiencepricing pressures that may adversely affect future results. In an effort tomitigate the overall effect of these pressures and to meet these consistentchallenges, we are focused on our continuing efforts to grow revenues and grossprofits from other customer and vendor relationships.

 

**Selling,General and Administrative Expenses.**Total selling, general and administrative expensesdecreased by 6.3% in the first quarter of fiscal year 2010 as compared with thefirst quarter of fiscal year 2009. Selling, general and administrative expensesas a percentage of revenues increased to 23.7% in the first quarter of fiscalyear 2010 from 22.5% in the first quarter of fiscal year 2009. The largestfactors contributing to the decrease in total selling, general andadministrative expenses were decreased compensation, and marketing and salespromotion expenses during the first quarter of fiscal year 2010.

 

Compensation costsprimarily decreased due to decreased quarterly bonus and 401(k) expenses ascompared to last year’s first quarter related to our cash and equity bonusprograms as well as decreased variable sales compensation based on lower grossprofit. Total compensation costs, including benefits and bonus expense,decreased approximately $858,000 in the first quarter of fiscal year 2010, ascompared to the first quarter of fiscal year 2009.

 

Marketing and salespromotion expenses decreased by approximately $415,000 in the first quarter offiscal year 2010 as compared with the first quarter of fiscal year 2009,primarily due to decreased expenses incurred for sponsorships and print andonline advertising.

 

We continually evaluatethe credit worthiness of our existing customer receivable portfolio and providean appropriate reserve based on this evaluation. We also evaluate the creditworthiness of prospective and current customers and make decisions regardingextension of credit terms to such customers based on this evaluation.Accordingly, we recorded a provision for bad debts of $556,000 and$266,700 for the first quarter ended June 28, 2009 and June 29, 2008,respectively. This increase in bad debt expense is related to customerwrite-offs during the first quarter of this fiscal year and the anticipationfor further increases in write-offs related to outstanding receivables as of June 28,2009, due largely to the downturn in the global economy as discussed above.

 

**InterestExpense, Net.** Netinterest expense decreased from $136,800 in the first quarter of fiscal year2009 to $109,300 in the first quarter of fiscal year 2010, primarily due todecreased average borrowings on our revolving line of credit facility.

 

**IncomeTaxes, Net Income and Diluted Earnings per Share.**The effective tax rate in the firstquarter of fiscal year 2010 was 39.2% as compared with 39.0% in the firstquarter of fiscal year 2009. As a result of the factors discussed above, netincome for the first quarter of fiscal year 2010 decreased 7.3% and dilutedearnings per share increased 2.7%, compared to the corresponding prior-yearquarter. The increase in diluted earnings per share despite a decrease in netincome is primarily attributable to a decrease in outstanding shares as aresult of our stock buyback program and a large share repurchase made through aprivate transaction during the second quarter of fiscal year 2009.

 

###### **Liquidity and Capital Resources**

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|------------------------|------------|
| ** **                                   | ** ** | **June 28, 2009** | ** ** | **June 29, 2008** | ** ** |
| Cash  flows provided by operating activities |       | $                      | 6,641,500  |   | $ | 8,209,900 |   |
| Cash  flows used in investing activities     |       | (2,674,000             | )          | (1,659,400 | ) |
| Cash  flows used in financing activities     |       | (167,000               | )          | (3,618,900 | ) |
| Net  increase in cash and cash equivalents   |       | $                      | 3,800,500  |   | $ | 2,931,600 |   |

 

We generated $6.6million of net cash from operating activities in the first three months offiscal year 2010 compared with $8.2 million in the first three months of fiscalyear 2009. In the first three months of fiscal year 2010, our cash inflow fromoperating activities was primarily driven by net income, net of depreciationand amortization and non-cash stock compensation expense, as well as by asignificant increase in accounts payable and an increase in accrued income andsales tax liabilities, partially offset by a increase in trade accounts receivableand an increase in product inventory. The increase in accounts payable islargely due to the timing and credit terms of inventory receipts. The accrualfor income 

 

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and sales taxliabilities increased primarily due to the amount and timing of estimatedfederal income tax payments. The increase in trade accounts receivable isprimarily due to the timing of sales and collections largely related to ourlarge tier-one carrier. The increased inventory levels are to improve ourinventory availability for our customers.

 

Capitalexpenditures of $0.3 million in the first three months of fiscal year 2010 werein line with expenditures of $0.4 million in the first three months of fiscalyear 2009. In both periods, capital expenditures primarily consisted ofinvestments in information technology.

 

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 $3.9 million,and potential additional cash earn-out payment obligations accruing over afour-year period, contingent on the achievement by TerraWave/GigaWave businessunit post acquisition of certain minimum earnings thresholds. Of the $3.9million cash amount paid at closing, $1.5 million was a non-refundableprepayment against future earn-out obligations, amortizable over the four-yearperiod. To the extent that the minimum earnings thresholds are not achievedover the remainder of the four-year period, we will not be able to apply theremainder of this prepayment ($375,000 as of June 28, 2009). To date, wehave paid $5.9 million in earn-out payments, thus the maximum amount ofcontingent future earn-out payments that could be earned through April 2010is $9.6 million. Contingent payments made under the terms of the acquisitionagreement are treated as an additional cost of the acquired businesses andadditional goodwill has been and will continue to be recorded through April2010, if earnings targets are achieved. For the three month periodended June 28, 2009, approximately $2.4 million in earn-out payments weremade, based on achievement of certain earnings thresholds in accordance withthe terms of the purchase agreement. As of June 28, 2009,there is no accrual for additional earn-out obligations, because the finalearn-out period does not end until April 2010, and thus no goodwill can beaccrued until then.

 

Net cash used infinancing activities was $0.2 million in the first three months of fiscal year2010 compared with a net cash outflow from financing activities of $3.6 millionfor the first three months of fiscal year 2009. For the first three months of fiscalyear 2010, our cash outflow from financing activities was primarily due to anexcess tax loss from stock-based compensation as well as treasury stocktransactions with employees and directors for minimum tax withholdings relatedto equity compensation, partially offset by borrowings on our Baltimore CountyEconomic Development Revolving Loan Fund. The excess tax loss is due to theultimate tax deduction we will be able to recognize for awards that vestedduring the quarter being less than the cumulative compensation cost previouslyrecognized for financial reporting purposes. For the first three months of fiscalyear 2009, our cash outflow from financing activities was primarily driven byrepayments on our revolving line of credit and treasury stock transactions withemployees and directors for minimum tax withholdings related to equitycompensation. During the first three months of fiscal years 2010 and 2009, wedid not repurchase any shares of our outstanding common stock pursuant to ourstock buyback program. From the beginning of our stock buyback program (thefirst quarter of fiscal year 2004), through the end of the first quarter offiscal year 2010, a total of 2,311,128 shares have been purchased under this programfor approximately $30.3 million, or an average price of $13.12 per share. TheBoard of Directors has authorized the purchase of up to 2,395,567 shares in theaggregate pursuant to this program, and therefore, 84,439 shares remainedavailable to be purchased as of the end of the first quarter of fiscal year2010. We expect to fund future purchases, if any, from working capital and/orour revolving credit facility. No timetable has been set for the completion orexpiration of this program. On July 1, 2008, separate from, and inaddition to, our stock buyback program, we repurchased all 470,000 shares ofour common stock then held by Brightpoint, Inc. (“Brightpoint”) in aprivately negotiated transaction. See Note 10 to the consolidated financialstatements for additional discussion of the Brightpoint transaction.

 

We are party to anunsecured revolving credit facility with SunTrust Bank and Wachovia Bank,National Association, with interest payable monthly at the LIBOR rate plus anapplicable margin. Pursuant to the terms of this facility, we are permitted torepurchase up to $25 million of common stock from May 31, 2007 forward andto pay cash dividends of up to a stated amount, annually. Borrowingavailability under this facility is determined in accordance with a borrowingbase and the applicable credit agreement includes financial covenants,including a minimum tangible net worth covenant, a minimum cash flow to debtservice ratio, and a maximum funded debt to EBITDA ratio. The terms applicableto our revolving credit facility also limit our ability to engage in certaintransactions or activities, including (but not limited to) investments andacquisitions, sales of assets, issuance of additional debt and other matters.As of June 28, 2009, we had a zero balance outstanding on our revolvingcredit facility; therefore, we had the full committed amount (then $50 million)available, subject to the limitations imposed by the borrowing base andcontinued compliance with the other applicable terms, including the covenantsdiscussed above.

 

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Since the end of the first quarter, we enteredinto a Third Modification Agreement (the “Third Modification Agreement”), datedas of July 22, 2009, with SunTrust Bank and Wachovia Bank, NationalAssociation, amending the Credit Agreement and related promissory note for therevolving credit facility discussed above. Pursuant to and in connection withthe Third Modification Agreement, the maximum available principal amount wasreduced to $35 million from $50 million, and the term of the revolving creditfacility, as so modified, was extended (from May 2010) to May 31,2012. The Third Modification Agreement also provides for modification ofcertain of the financial covenants on a going forward basis, including the “tangiblenet worth” and “maximum funded debt to EBITDA” covenants. In addition, theamount of allowable dividend payments under the Credit Facility was increasedfrom $2.0 million (the previous stated amount) to $2.5 million in any 12 monthperiod, assuming continued compliance with the otherwise applicable terms. TheThird Modification Agreement also provides for increases in the applicablemargins (from a range of 1.25% to 2.75% to a new range of 2.25% to 3.25%) andunused facility fees, as are not uncommon in the current borrowing and lendingenvironment. In an effort to offset the impact of these increases, managementconsidered the Company’s track record of positive cash flows and relativelysmall historical borrowings under the revolving credit facility, and requestedthe reduction in the maximum available principal amount.

 

Pursuant to the relevant documents, thefinancial covenants included in the Credit Agreement for the unsecuredrevolving credit facility are also applicable to our existing Term Loan withthe same lenders, having an original principal amount of $5.5 million andsecured by our Hunt Valley, Maryland facility. Accordingly, the ThirdModification Agreement also has the effect of amending the financial covenantsapplicable to the Term Loan. At June 28, 2009, the principal balance ofthis term loan was $3.4 million.

 

On March 31, 2009, we entered into a term loan with theBaltimore County Economic Development Revolving Loan Fund for an aggregateprincipal amount of $250,000. The term loan is payable in equal monthlyinstallments of principal and interest of $2,300, with the balance due atmaturity, April 1, 2019. The term loan bears interest at 2.00% per annumand is secured by a subordinate position on our Hunt Valley, Maryland facility.

 

On July 28, 2009, we announced that our Board of Directorsdetermined to commence a dividend program and has declared an initial quarterlycash dividend of ten cents ($0.10) per share of common stock, par value $0.01per share, of the Company, payable on August 26, 2009, to shareholders ofrecord as of August 12, 2009. Any future declaration of dividends and theestablishment of any corresponding record and payment dates remains subject tofurther determination from time to time by the Board of Directors.

 

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 interest expense, our policy is to use excessavailable cash to pay down any balance on our revolving credit facility. Weexpect to meet short-term and long-term liquidity needs through operating cashflow, supplemented by our revolving credit facility. In doing so, the balanceon our revolving credit facility could increase depending on our workingcapital and other cash needs. If we were to undertake an acquisition or other majorcapital purchases that require funds in excess of existing sources ofliquidity, we would look to sources of funding from additional creditfacilities, debt and/or equity issuances. There can be no assurances that suchadditional future sources of funding would be available on terms acceptable tous, 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.

 

###### **Recent 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 toinvestors’ requests for expanded information about the extent to whichcompanies measure assets and liabilities at fair value, the information used tomeasure fair value, and the effect of fair 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 useof fair value in any new circumstances. In February 2008, the FASBpartially 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 our case, the fiscal yearbeginning March 30, 2009. We adopted SFAS No. 157 for our financial 

 

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assets and liabilities effective as of March 31,2008, and adopted SFAS No. 157 for non-financial assets and liabilitieseffective March 30, 2009. The adoption of SFAS No. 157 did not have amaterial impact on our consolidated financial statements. See Note 5 to theconsolidated financial statements for additional disclosure.

 

In December 2007, the FASB issued SFAS No. 141(R),“Business Combinations,” which replaces SFAS No. 141. The standard retainsthe fundamental requirements of SFAS No. 141 that the acquisition methodof accounting (labeled the purchase method under SFAS No. 141) be used forall business combinations and that an acquirer be identified for each businesscombination. SFAS No. 141(R) requires the assets, liabilities,noncontrolling interests, certain acquired contingencies and contingentconsideration during a business combination to be measured at their fair valueas of the acquisition date. SFAS No. 141(R) is effective for fiscalyears beginning on or after December 15, 2008. We adopted SFAS No. 141(R) onMarch 30, 2009 for any acquisitions made subsequent to that date. Theadoption of SFAS No. 141(R) did not impact the accounting foracquisitions made by the Company prior to March 30, 2009, however it willimpact the accounting treatment of all acquisitions made after such date.

 

In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities — an amendmentof FASB Statement No. 133.” Under SFAS No. 161, entities are requiredto provide enhanced disclosures about (a) how and why an entity usesderivative instruments, (b) how derivative instruments and related hedgeditems are accounted for under FASB Statement No. 133 and its relatedinterpretations, and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance and cashflows. The provisions of this statement are effective for periods beginningafter November 15, 2008, and both early application and comparativedisclosures are encouraged. The adoption of SFAS No. 161 did not have amaterial impact on our consolidated financial statements. 

 

In April 2009, the FASB issued FSP No. 107-1and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments(“FSP No. 107-1”). FSP No. 107-1 amends SFAS No. 107,“Disclosures about Fair Value of Financial Instruments” to extend thedisclosure requirements regarding the fair value of financial instruments tointerim financial statements. FSP No. 107-1 is effective for interimreporting periods ending after June 15, 2009, with early adoptionpermitted for periods ending after March 15, 2009. We adopted FSP No. 107-1effective June 28, 2009. The adoption of FSP No 107-1 did not have amaterial impact on our consolidated financial statements. See Note 5 to theconsolidated financial statements for additional disclosure.

 

In May 2009, the FASB issued SFAS No. 165,“Subsequent Events.” SFAS No. 165 provides guidance to establish generalstandards of accounting for and disclosures of events that occur after balancesheet date but before financial statements are issued or are available to beissued. SFAS No. 165 requires disclosure of the date through which anentity has evaluated subsequent events and the basis for that date. SFAS No. 165is effective for interim or annual financial periods ending after June 15,2009. The adoption of SFAS No. 165 did not have a material impact on ourconsolidated financial statements. See Note 12 to the consolidated financialstatements for additional disclosure.

 

InJuly 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of GenerallyAccepted Accounting Principles — a replacement of FASB SFAS No. 162” (the “Codification”). Other thanresolving certain minor inconsistencies in current United States GenerallyAccepted Accounting Principles (“GAAP”), the Codification does not change GAAP,but is intended to make it easier to find and research GAAP applicable toparticular transactions or specific accounting issues. The Codification is anew structure which takes accounting pronouncements and organizes them byapproximately ninety accounting topics. The Codification will be the singlesource of authoritative nongovernmental U.S. GAAP. All guidance included in theCodification is authoritative, even guidance that comes from what used to bedeemed a non-authoritative section of a standard. All non-grandfathered,non-SEC accounting literature not included in the Codification isnon-authoritative. The Codification is effective for interim and annual periodsending after September 15, 2009. We do not believe the adoption of theCodification will have a material impact on our consolidated financialstatements.

 

###### **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 United States.The preparation of these financial statements requires us to make estimates andjudgments that affect the reported 

 

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amount of assets,liabilities, revenues and expenses and related disclosure of contingent assetsand liabilities. Actual results may differ from these estimates under differentassumptions or conditions.

 

For a detaileddiscussion on our critical accounting policies, please refer to our AnnualReport on Form 10-K for the fiscal year ended March 29, 2009.

 

###### **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 our 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 companies thatwe may undertake in an effort to expand our business; the possibility that, forunforeseen reasons, we may be delayed in entering into or performing, or mayfail 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 InternetWebsite address is: www.tessco.com. We make available free of charge throughour Website, 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 ourWebsite is our Code of Business Conduct and Ethics.

 

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

 

The Company’s ChiefExecutive Officer (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 these controlsand procedures required by Rules 13a-15(b) or 15d-15(b) of theExchange 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 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**

 

**Item 1.Legal Proceedings.**

 

Lawsuits andclaims are filed against us from time to time in the ordinary course ofbusiness. We do not believe that any lawsuits or claims currently pendingagainst the Company, individually or in the aggregate, are material, or willhave a material adverse affect on our financial condition or results ofoperations. In addition, from time to time, we are also subject to review fromfederal and state taxing authorities in order to validate the amounts ofincome, sales and/or use taxes which have been claimed and remitted. Marylandstate income tax returns for fiscal years 2006 through 2008 are currently underexamination. No other federal, state and local income tax returns are currentlyunder examination.

 

**Item 1A.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 29, 2009.Nevertheless, information that we have disclosed or will disclose from time totime in our public filings (including this Quarterly Report on Form 10-Qand other periodic reports filed under the Exchange Act) may provide additionaldata or information relative to our previously disclosed risk factors.

 

###### **Item 2. Unregistered Sales of Equity Securitiesand Use of Proceeds.**

 

The followingtable sets forth information with respect to purchases of TESSCO common stockby the Company or any affiliated purchasers during the first quarter of fiscalyear 2010:

 
| **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)** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| March 30,  2009 through April 26, 2009(3) |       | 5,697                                   |       | $                                   | 6.85       |                                                                                          | —     |                                                                                       | 84,439     |   |
| April 27,  2009 through May 31, 2009(3)   |       | 7,112                                   |       | 8.82                                |       | —                                                                                        |       | 84,439                                                                                     |       |
| June 1,  2009 through June 28, 2009       |       | —                                  |       | N/A                                 |       | —                                                                                        |       | 84,439                                                                                     |       |
| Total                                               |       | 12,809                                  |       | $                                   | 7.94       |                                                                                          | —     |                                                                                       | 84,439     |   |

 

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| (1) | Periods indicated are  fiscal accounting months for the first quarter of fiscal year 2010.                                                                                                                                          |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Amounts are as of the  end of the fiscal accounting month or quarter, as applicable.                                                                                                                                                |
| (3) | Represents  shares either withheld from or delivered to the Company by employees or  directors upon stock option exercises or in connection with PSU and  restricted stock awards, in order to pay related minimum tax liabilities. |

 

On April 28,2003, our Board of Directors announced a stock buyback program. As of June 28,2009, the Board of Directors has authorized the purchase of up to 2,395,567shares of outstanding common stock under the stock buyback program. During thefirst quarter of 2010, the Company did not repurchase any shares of its commonstock for pursuant to 

 

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this program. Asof June 28, 2009, we had purchased an aggregate of 2,311,128 shares of ouroutstanding common stock pursuant to this program for approximately $30.3million, or an average price of $13.12 per share. Accordingly, as of June 28,2009, 84,439 shares remained available for repurchase under this program.Shares may be purchased from time to time under this program in the openmarket, by block purchase, or through negotiated transactions, or possiblyother transactions managed by broker-dealers. No timetable has been set forcompletion or expiration of the program. On July 1, 2008,separate from, and in addition to, the stock buyback program, we repurchasedall 470,000 shares of our common stock then held by Brightpoint, Inc. (“Brightpoint”)in a privately negotiated transaction. See Note 10 to the consolidatedfinancial statements for additional discussion of the Brightpoint transaction. Our revolving credit facility and termloan with SunTrust Bank and Wachovia Bank, National Association, limit to $25million the aggregate dollar value of shares that may be repurchased from May 31,2007 forward. As of June 28, 2009, we had the ability to purchaseapproximately $12 million in additional shares of common stock withoutviolating this covenant.

 

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

###### ** **

None.

 

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

###### ** **

TheCompany held its Annual Meeting of Shareholders at the Company’s facilitylocated in Timonium, Maryland on July 23, 2009.  At the meeting, the shareholders were askedto vote on the election of three directors, the ratification of the appointmentof the Company’s independent registered public accounting firm and ashareholder proposal on elimination of the Shareholder Rights Plan.  Each of these proposals was described in theCompany’s Definitive Proxy Statement filed with the Securities and ExchangeCommission on June 12, 2009.

 

ELECTIONOF DIRECTORS.  At the meeting, theshareholders re-elected John D. Beletic, Daniel Okrent and Morton F. Zifferer, Jr.to the Board of Directors for a three-year term expiring at the Company’s 2012Annual Meeting of Shareholders and until their successors are duly elected andqualified.  The term of office of each ofDennis Shaughnessy, Jay G. Baitler, Robert B. Barnhill, Jr. and Benn R.Konsynski, Ph.D. also continued after the meeting.  The votes cast or withheld in respect of theelection of Mr. Beletic, Mr. Okrent and Dr. Zifferer were asfollows:

 
| John D. Beletic               |   | 3,554,303 |   | For      |   |
|-------------------------------|--------|-----------|--------|----------|--------|
|                          |   | 1,017,511 |   | Withheld |   |
|                          |   |      |   |     |   |
| Daniel Okrent                 |   | 3,525,749 |   | For      |   |
|                          |   | 1,046,065 |   | Withheld |   |
|                          |   |      |   |     |   |
| Morton F.  Zifferer, Jr. |   | 3,527,599 |   | For      |   |
|                          |   | 1,044,215 |   | Withheld |   |

 

INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM.  Atthe meeting, the shareholders ratified the appointment of Ernst &Young LLP to serve as the independent registered public accounting firm of theCompany for the fiscal year ending March 28, 2010.  The number of votes “for” was 4,569,178, thenumber of votes “against” or “withheld” was 2,366 and the number of sharesrepresenting abstentions was 270. Accordingly, the proposal was approved.

 

SHAREHOLDERPROPOSAL ON ELIMINATION OF THE SHAREHOLDER RIGHTS PLAN.  At the meeting, a shareholder proposal toeliminate the Company’s Shareholder Rights Plan was presented.  The number of votes “for” was 1,971,909, thenumber of votes “against” was 2,206,265, the number of shares representingabstentions was 4,625 and the number of “non votes” was 389,015. Accordingly,the proposal was not approved.

 

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

 

None.

 

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###### **Item 6. Exhibits.**

 
| (a)   EXHIBITS: |   |                                                                                                                                                                                                                                                                                             |
|--------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                           |   |                                                                                                                                                                                                                                                                                             |
| 10.1                           |   | Third Modification  Agreement, made effective July 22, 2009, 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 (filed herewith). |
| 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.                                                                                                                                                                                                                     |

 

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**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: August 12,  2009 | By:                          | /s/ David M. Young |
|                             |                              | David M. Young |
|                             |                              | Chief Financial Officer |
|                             |                              | (principal financial  and accounting officer) |

 

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