** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

 

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

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

 

##### **Forthe quarterly period ended December 30, 2007**

** **

**OR**

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

 

**For the transition period from           to          **

# * *

 

**CommissionFile Number: 0-24746**

# *** ***

 

# ***TESSCO TECHNOLOGIES INCORPORATED***

(Exact name ofregistrant as specified in charter)

 

 

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

 

 

Registrant’s telephone number, including area code:     **(410) 229-1000**

 

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tofiling requirements for the past 90 days.    Yes  x    No  o

 

Indicateby check mark if the registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).

Large accelerated filer  ̈         Acceleratedfiler   ̈         Non-AcceleratedFiler x

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act)..    Yes  o    No  x

 

Thenumber of shares of the registrant’s Common Stock, $.01 par value per share,outstanding as of February 1, 2008, was 5,154,973.

 

 

----

**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 3.                   | Quantitative  and Qualitative Disclosures About Market Risk |
|             |                      |   |
|             | Item 4T.                  | 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 |
|             |                      |   |
| ** **       | Signature                 |   |

 

 

 

2

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###### ** **

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

###### ** **

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

 

**TESSCOTECHNOLOGIES INCORPORATED**

**Consolidated Balance Sheets**

** **
| ** **                                         | ** ** | **December 30,  2007** | ** **  | **April 1,****2007** | ** ** |
|----------------------------------------------------|------------|-----------------------------|-------------|---------------------------|------------|
| ** **                                         | ** ** | **(unaudited)**             | ** **  | ** **                | ** ** |
| **ASSETS**                                         | ** ** | ** **                  | ** **  | ** **                | ** ** |
|                                               |       |                        |        |                      |       |
| Current assets:                                    |       |                        |        |                      |       |
| Cash and cash equivalents                          |       | $                           | 1,288,200   |                      | $          | 4,176,300 |   |
| Trade accounts receivable, net                     |       | 52,242,800                  |        | 44,859,600                |       |
| Product inventory, net                             |       | 54,470,500                  |        | 37,448,800                |       |
| Deferred tax asset                                 |       | 3,460,100                   |        | 3,460,100                 |       |
| Prepaid expenses and other current assets          |       | 3,412,800                   |        | 1,959,500                 |       |
| Total current assets                               |       | 114,874,400                 |        | 91,904,300                |       |
|                                               |       |                        |        |                      |       |
| Property and equipment, net                        |       | 23,165,200                  |        | 24,256,300                |       |
| Goodwill, net                                      |       | 5,867,200                   |        | 5,008,300                 |       |
| Other long-term assets                             |       | 2,683,000                   |        | 2,513,800                 |       |
| Total assets                                       |       | $                           | 146,589,800 |                      | $          | 123,682,700 |   |
|                                               |       |                        |        |                      |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**      | ** ** | ** **                  | ** **  | ** **                | ** ** |
|                                               |       |                        |        |                      |       |
| Current liabilities:                               |       |                        |        |                      |       |
| Trade accounts payable                             |       | $                           | 66,523,100  |                      | $          | 47,257,700 |   |
| Payroll, benefits and taxes                        |       | 3,471,200                   |        | 6,658,500                 |       |
| Income and sales taxes                             |       | 3,571,200                   |        | 2,960,800                 |       |
| Accrued expenses and other current liabilities     |       | 1,258,900                   |        | 1,143,800                 |       |
| Revolving line of credit                           |       | 6,059,000                   |        | —                    |       |
| Current portion of long-term debt                  |       | 359,300                     |        | 356,200                   |       |
| Total current liabilities                          |       | 81,242,700                  |        | 58,377,000                |       |
|                                               |       |                        |        |                      |       |
| Deferred tax liability                             |       | 2,700,400                   |        | 2,700,400                 |       |
| Long-term debt, net of current  portion            |       | 3,933,300                   |        | 4,203,200                 |       |
| Other long-term liabilities                        |       | 1,608,100                   |        | 1,250,800                 |       |
| Total liabilities                                  |       | 89,484,500                  |        | 66,531,400                |       |
|                                               |       |                        |        |                      |       |
| Commitments and contingencies                      |       |                        |        |                      |       |
|                                               |       |                        |        |                      |       |
| Shareholders’ equity:                         |       |                        |        |                      |       |
| Preferred stock                                    |       | —                      |        | —                    |       |
| Common stock                                       |       | 78,100                      |        | 75,800                    |       |
| Additional paid-in capital                         |       | 30,673,700                  |        | 27,463,700                |       |
| Treasury stock                                     |       | (33,454,300                 | )           | (27,216,200               | )          |
| Retained earnings                                  |       | 59,850,900                  |        | 56,806,300                |       |
| Accumulated other comprehensive income, net of tax |       | (43,100                     | )           | 21,700                    |       |
| Total shareholders’ equity                    |       | 57,105,300                  |        | 57,151,300                |       |
| Total liabilities and shareholders’ equity    |       | $                           | 146,589,800 |                      | $          | 123,682,700 |   |

 

See accompanying notes.

 

3

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**TESSCO TECHNOLOGIES INCORPORATED**

**Consolidated Statements ofIncome**

 
| ** **                                    | ** ** | **Fiscal Quarters Ended**     | ** **  | **Nine Months Ended**         | ** ** |
|-----------------------------------------------|------------|-------------------------------|-------------|-------------------------------|------------|
| ** **                                    | ** ** | **December 30,****2007** | ** **  | **December 24,****2006** | ** ** | **December 30,****2007** | ** ** | **December 24,****2006** | ** ** |
| ** **                                    | ** ** | **(unaudited)**               | ** **  | **(unaudited)**               | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
|                                          |       |                          |        |                          |       |   |   |   |   |
| Revenues                                      |       | $                             | 135,732,000 |                          | $          | 134,716,700 |   | $ | 392,680,400 |   | $ | 365,312,700 |   |
| Cost of goods sold                            |       | 105,329,600                   |        | 101,838,200                   |       | 305,436,400 |   | 274,319,200 |   |
|                                          |       |                          |        |                          |       |   |   |   |   |
| Gross profit                                  |       | 30,402,400                    |        | 32,878,500                    |       | 87,244,000 |   | 90,993,500 |   |
|                                          |       |                          |        |                          |       |   |   |   |   |
| Selling, general and  administrative expenses |       | 27,729,000                    |        | 29,730,700                    |       | 81,737,800 |   | 81,554,600 |   |
|                                          |       |                          |        |                          |       |   |   |   |   |
| Income from operations                        |       | 2,673,400                     |        | 3,147,800                     |       | 5,506,200 |   | 9,438,900 |   |
|                                          |       |                          |        |                          |       |   |   |   |   |
| Interest, net                                 |       | 161,000                       |        | 323,800                       |       | 337,800 |   | 659,600 |   |
|                                          |       |                          |        |                          |       |   |   |   |   |
| Income before provision for  income taxes     |       | 2,512,400                     |        | 2,824,000                     |       | 5,168,400 |   | 8,779,300 |   |
|                                          |       |                          |        |                          |       |   |   |   |   |
| Provision for income taxes                    |       | 978,100                       |        | 1,059,100                     |       | 2,051,700 |   | 3,305,000 |   |
|                                          |       |                          |        |                          |       |   |   |   |   |
| Net income                                    |       | $                             | 1,534,300   |                          | $          | 1,764,900 |   | $ | 3,116,700 |   | $ | 5,474,300 |   |
|                                          |       |                          |        |                          |       |   |   |   |   |
| Basic earnings per share                      |       | $                             | 0.30        |                          | $          | 0.33 |   | $ | 0.59 |   | $ | 0.93 |   |
|                                          |       |                          |        |                          |       |   |   |   |   |
| Diluted earnings per share                    |       | $                             | 0.29        |                          | $          | 0.31 |   | $ | 0.56 |   | $ | 0.89 |   |
|                                          |       |                          |        |                          |       |   |   |   |   |
| Basic weighted average shares  outstanding    |       | 5,151,800                     |        | 5,320,600                     |       | 5,299,400 |   | 5,915,500 |   |
|                                          |       |                          |        |                          |       |   |   |   |   |
| Diluted weighted average  shares outstanding  |       | 5,374,400                     |        | 5,629,300                     |       | 5,535,800 |   | 6,127,000 |   |

 

See accompanying notes.

 

4

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**TESSCOTECHNOLOGIES INCORPORATED**

**Consolidated Statements ofCash Flows**

 
| ** **                                                                                                | ** ** | **Nine Months Ended**       | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                | ** ** | **December 30,  2007** | ** ** | **December 24,  2006** | ** ** |
| ** **                                                                                                | ** ** | **(unaudited)**             | ** ** | **(unaudited)** | ** ** |
| Cash flows from operating  activities:                                                                    |       |                        |       |   |   |
| Net income                                                                                                |       | $                           | 3,116,700  |   | $ | 5,474,300 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:                        |       |                        |       |   |   |
| Depreciation and amortization                                                                             |       | 3,637,400                   |       | 3,525,000 |   |
| Non-cash stock compensation expense                                                                       |       | 1,514,400                   |       | 1,571,900 |   |
| Deferred taxes and other non-cash items                                                                   |       | 68,700                      |       | 113,500 |   |
| Change in trade accounts receivable                                                                       |       | (7,085,200                  | )          | (8,372,900 | ) |
| Change in product inventory                                                                               |       | (17,021,700                 | )          | (11,371,400 | ) |
| Change in prepaid expenses and other current assets                                                       |       | (302,200                    | )          | (1,193,100 | ) |
| Change in trade accounts payable                                                                          |       | 19,982,700                  |       | 22,439,300 |   |
| Change in payroll, benefits and taxes                                                                     |       | (3,199,500                  | )          | 2,135,400 |   |
| Change in income and sales tax                                                                            |       | (353,600                    | )          | 628,200 |   |
| Change in accrued expenses and other current liabilities                                                  |       | 115,100                     |       | (11,600 | ) |
| Net cash provided by operating activities                                                                 |       | 472,800                     |       | 14,938,600 |   |
|                                                                                                      |       |                        |       |   |   |
| Cash flows from investing  activities:                                                                    |       |                        |       |   |   |
| Purchases of property and equipment                                                                       |       | (2,282,900                  | )          | (2,944,800 | ) |
| Acquisition of business in purchase transaction and additional  earn-out  payments on acquired businesses |       | (2,330,000                  | )          | (4,533,300 | ) |
| Net cash used in investing activities                                                                     |       | (4,612,900                  | )          | (7,478,100 | ) |
|                                                                                                      |       |                        |       |   |   |
| Cash flows from financing  activities:                                                                    |       |                        |       |   |   |
| Net borrowings from revolving line of credit                                                              |       | 6,059,000                   |       | 5,629,400 |   |
| Payments on long-term debt                                                                                |       | (266,800                    | )          | (354,100 | ) |
| Proceeds from issuance of stock                                                                           |       | 563,900                     |       | 338,400 |   |
| Purchase of treasury stock                                                                                |       | (6,238,100                  | )          | (17,695,100 | ) |
| Excess tax benefit from stock-based compensation                                                          |       | 1,134,000                   |       | 229,500 |   |
| Bank overdraft                                                                                            |       | —                      |       | 2,104,500 |   |
| Net cash provided by (used in) financing activities                                                       |       | 1,252,000                   |       | (9,747,400 | ) |
|                                                                                                      |       |                        |       |   |   |
| Net decrease in cash and cash equivalents                                                                 |       | (2,888,100                  | )          | (2,286,900 | ) |
|                                                                                                      |       |                        |       |   |   |
| Cash and cash equivalents,  beginning of period                                                           |       | 4,176,300                   |       | 2,286,900 |   |
|                                                                                                      |       |                        |       |   |   |
| Cash and cash equivalents, end  of period                                                                 |       | $                           | 1,288,200  |   | $ | — |   |

 

See accompanying notes.

 

5

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**TESSCO Technologies Incorporated**

**Notes toConsolidated Financial Statements**

**December 30, 2007**

(Unaudited)

 

**Note 1.  Description of Business and Basis ofPresentation**

 

TESSCOTechnologies Incorporated, a Delaware corporation (TESSCO or the Company), is aleading provider of integrated product and supply chain solutions to theprofessionals that design, build, run, maintain and use wireless, mobile, fixedand in-building systems. The Company provides marketing and sales services,knowledge and supply chain management, product-solution delivery and controlsystems utilizing extensive Internet and information technology.  Approximately 96% of the Company’s sales aremade to customers in the United States. The Company takes orders in several ways, including phone, fax, onlineand through electronic data interchange.

 

In management’s opinion, the accompanying interimfinancial statements of the Company include all adjustments, consisting only ofnormal, recurring adjustments, necessary for a fair presentation of the Company’sfinancial position for the interim periods presented.  These statements are presented in accordancewith the rules and regulations of the Securities and Exchange Commission(SEC).  Certain information and footnotedisclosures normally included in the Company’s annual financial statements havebeen omitted from these statements, as permitted under the applicable rules andregulations.  The results of operationspresented in the accompanying interim financial statements are not necessarilyrepresentative of operations for an entire year.  The information included in this Form 10-Qshould be read in conjunction with the financial statements and notes theretoincluded in the Company’s Form 10-K for the fiscal year ended April 1,2007.

 

**Note 2.  Recently Issued Accounting Pronouncements**

 

In September 2006, the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting Standard (SFAS)No. 157, “Fair Value Measurements,” which provides guidance for using fairvalue to measure assets and liabilities. The standard also responds to investors’ requests for expandedinformation about the extent to which companies measure assets and liabilitiesat fair value, the information used to measure fair value, and the effect offair value measurements on earnings. The standard applies whenever otherstandards require (or permit) assets or liabilities to be measured at fairvalue. The standard does not expand the use of fair value in any newcircumstances.  SFAS No. 157 iseffective for fiscal years beginning after November 15, 2007, and interimperiods within those fiscal years.  In February 2008,the FASB partially deferred the effective date of SFAS No. 157 for certainnon-financial assets and liabilities that are recognized or disclosed at fairvalue in the financial statements on a nonrecurring basis until November 15,2008.  The Company is reviewing SFAS No. 157to determine the impact of adoption on its financial statements.

 

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities —Including an Amendment of FASB Statement No. 115.”  SFAS No. 159 permits an entity tomeasure many financial instruments and certain other items at fair value thatare not currently required to be measured at fair value.  Entities that elect the fair value optionwill report unrealized gains and losses in earnings at each subsequentreporting date.  SFAS No. 159 iseffective for fiscal years beginning after November 15, 2007.  The Company is reviewing SFAS No. 159 todetermine the impact of adoption on its financial statements.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

6

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** **

**Note 3.  Borrowings Under Revolving Credit Facilityand Long-Term Debt**

** **

On May 31, 2007, the Company replaced its previously existing $30million revolving line of credit facility with a new $50 million revolving lineof credit facility with SunTrust Bank and Wachovia Bank, N.A.  The previous facility was established in September 2003and had a term expiring in September 2007, was unsecured and had providedfor monthly payments of interest accruing at a LIBOR rate plus an applicablemargin ranging from 1.5% to 2.0%.  Thenew facility has a term expiring in May 2010, with interest also payablemonthly at a LIBOR rate plus an applicable margin, which ranges from 1.25% to2.75%.  Like the replaced facility,borrowing availability under this new facility is determined in accordance witha borrowing base.  This new facilityincludes financial covenants, including a minimum tangible net worth, minimumcash flow coverage of debt service, and a maximum funded debt to EBITDAratio.  These financial covenants alsoapply to a separate but related term loan secured by the Company’s Hunt Valley,Maryland facility.  The terms applicableto the new revolving line of credit facility and term loan also limit theCompany’s ability to engage in certain transactions or activities, including(but not limited to) investments and acquisitions, sales of assets, payment ofdividends, issuance of additional debt and other matters.  At December 30, 2007, the Company had abalance of $6.1 million outstanding on its current revolving line of creditfacility.  At April 1, 2007, theCompany had no outstanding balance on its revolving line of credit facility.

 

**Note 4.  Stock Compensation**

 

TheCompany’s selling, general and administrative expenses for the fiscal quarterand nine months ended December 30, 2007 includes $434,800 and $1,514,400,respectively, of stock compensation expense. The Company’s selling, general and administrative expenses for thefiscal quarter and nine months ended December 24, 2006 includes $579,900and $1,571,900, respectively, of stock compensation expense.  Stock compensation expense is primarilyrelated to our Performance Stock Unit (PSU) Program.  In addition, the Company recorded an excesstax benefit directly to shareholders’ equity of $1,134,000, primarily relatedto the 164,831 PSUs which vested during the nine months ended December 30,2007.

 

**PerformanceStock Units: **The followingtable summarizes the activity under the Company’s PSU program for the firstnine months of fiscal year 2008:

 

| ** **                                                                         | ** ** | **2008** | ** ** | **Weighted Average   Fair Value at Grant** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|--------------------------------------------|------------|
| Shares available  for issue under outstanding PSUs, non-vested beginning of period |       | 870,172  |       | $                                          | 10.15      |   |
| Granted                                                                            |       | 183,000  |       | 24.11                                      |       |
| Vested                                                                             |       | (164,831 | )          | 10.67                                      |       |
| Forfeited/cancelled                                                                |       | (454,310 | )          | 9.25                                       |       |
| Shares available  for issue under outstanding PSUs, non-vested end of period       |       | 434,031  |       | $                                          | 16.78      |   |

 

Of the 434,031 shares availablefor issuance under outstanding PSUs but not yet vested as of December 30,2007, 251,031 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 2008, 2009 and 2010.

 

The vast majority of the PSUs cancelledduring fiscal year 2008, 449,701 shares, related to the 2005 grant of PSUswhich had a 3-year measurement period.  During that period, actual earningsper share on a cumulative basis exceeded the threshold level, but did not reachthe goal level, and thus, the underlying shares not earned from those PSUs werecancelled accordingly.  Per the provisions of the 1994 Stock and IncentivePlan, the shares related to these PSUs were added back to the Plan and becameavailable for future issuance.

 

Duringfiscal year 2008, the Compensation Committee of the Board of Directors, withthe concurrence of the full Board of Directors, granted additional PSUs to selectkey individuals and directors, providing them with the opportunity to earn upto 183,000 additional shares of the Company’s common stock in the aggregate,depending upon whether certain threshold or goal earnings per share targets aremet, subject to individual performance for employees (independent directors arenot subject to individual performance factors). These PSUs have only one measurement year (fiscal year 2008), with anyshares earned at the end of fiscal year 2008 to vest and be issued 25% on orabout May 1 of 2008, 2009, 2010 and 2011, respectively, provided that theparticipant remains employed by or associated with the Company on each suchdate.

 

 

 

 

 

 

 

7

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Asof December 30, 2007, there was approximately $1.6 million of totalunrecognized compensation costs related to PSUs.  If the maximum target of PSUs outstandingwere assumed to be earned, total unrecognized compensation costs would beapproximately $6.0 million.

 

**Stock Options:**  In accordancewith SFAS No. 123R, the fair value of the Company’s stock options havebeen determined using the Black-Scholes-Merton option pricing model, based uponfacts and assumptions existing at the date of grant.  Stock options granted have exercise pricesequal to the market price of the Company’s common stock on the grant date.

 

Thevalue of each option at the date of grant is amortized as compensation expenseover the option service period.  Thisoccurs without regard to subsequent changes in stock price, volatility orinterest rates over time, provided that the option remains outstanding.  As of December 30, 2007, all outstandingstock options are fully vested. The following table summarizes the pertinentoption information for outstanding options for the nine months ended December 30,2007:

 

| *** ***                               | *** *** | **Shares** | ** ** | **Weighted Average   Exercise Price** | ** ** |
|--------------------------------------------|--------------|------------|------------|---------------------------------------|------------|
| Outstanding, beginning of period           |         | 185,000    |       | $                                     | 8.07       |   |
| Granted                                    |         | —     |       | —                                |       |
| Exercised                                  |         | (50,000    | )          | 7.33                                  |       |
| Cancelled                                  |         | —     |       | —                                |       |
| Outstanding and exercisable, end of period |         | 135,000    |       | 8.34                                  |       |
|                                            |              |            |            |                                       |            |  |

 

**Note 5.  Acquisition**

 

On July 2, 2007, the Company acquired the net assets and business ofNetForce Solutions, Inc. (NetForce), a provider of technical and salestraining solutions to wireless, telecommunications, and networkingindustries.  The purchase includedsubstantially all of the non-cash business assets for an initial cash paymentof approximately $650,000 and additional cash earn-out payments of up toapproximately $2.8 million over a four-year period, contingent on theachievement of certain earnings thresholds. The unaudited revenues earned by NetForce for calendar year 2006, priorto the acquisition, amounted to less than 1 percent of the amount of theCompany’s total revenue for fiscal year 2007.

 

The Company has included the financial results of NetForce in itsconsolidated financial statements beginning July 2, 2007 (AcquisitionDate).  Pro forma results have not beenpresented as the impact of the acquisition is not material and did not involvea significant amount of assets.  This business isincluded in the installation, test and maintenance segment.

 

For the period of July 2, 2007 through December 30, 2007, noadditional earn-out has been accrued, because applicable annual fiscal year2008 targets have not been met as of December 30, 2007.

 

**Note 6.  Income Taxes**

 

EffectiveApril 2, 2007, the Company adopted FASB Interpretation No. 48 (FIN48), “Accounting for Uncertainty in Income Taxes.”  As a result of the adoption of FIN 48, theCompany recognized a $72,100 decrease in beginning retained earnings as of April 2,2007.  As of April 2, 2007, theCompany had total gross unrecognized tax benefits of approximately $319,000,all of which, if recognized, would favorably affect the effective income taxrate in future periods. During the fiscal quarter ended December 30, 2007,there was a $86,400 decrease in unrecognized tax benefits, which includes a$196,200 reduction as a result of a lapse in state and federal statutes oflimitations.  The Company does notreasonably expect any material changes in the estimated amount of unrecognizedtax benefits prior to December 28, 2008.

 

TheCompany’s historical accounting policy with respect to interest and penaltiesrelated to tax uncertainties has been to classify these amounts as incometaxes, and the Company continued this classification upon the adoption of FIN48.  As of April 2, 2007, the total amount of accrued interest andpenalties related to uncertain tax positions recognized in the consolidatedbalance sheet was $26,200.  The totalamount of interest and penalties related to tax uncertainties recognized in thestatement of income for the fiscal quarter and nine months ended December 30,2007 was $10,200 and $46,300, respectively.

 

TheCompany files income tax returns in U.S. federal, state and local jurisdictions.  Income tax returns filed for fiscal years2004 and earlier are no longer subject to examination by U.S. federal, stateand local tax authorities.  No federal, stateand local income tax returns are currently under examination. Certain incometax returns for fiscal years 2005 through 2007 remain open to examination byU.S. federal, state and local tax authorities.

 

 

 

 

8

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**Note 7.  Earnings Per Share**

 

The dilutive effect of all options and PSUs outstandinghas been determined by using the treasury stock method.  The weighted average shares outstanding iscalculated as follows:

 

| ** **                                              | ** ** | **Fiscal Quarters Ended**        | ** ** | **Nine Months Ended**            | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
|                                                    | ** ** | **December 30,  2007** | ** ** | **December 24,  2006** | ** ** | **December 30,  2007** | ** ** | **December 24,  2006** | ** ** |
|                                                    |       |                             |       |                             |       |   |   |   |   |
| Basic weighted average common  shares outstanding       |       | 5,151,800                        |       | 5,320,600                        |       | 5,299,400 |   | 5,915,500 |   |
| Effect of dilutive common stock equivalents outstanding |       | 222,600                          |       | 308,700                          |       | 236,400 |   | 211,500 |   |
| Diluted weighted average  common shares outstanding     |       | 5,374,400                        |       | 5,629,300                        |       | 5,535,800 |   | 6,127,000 |   |

 

Asof December 30, 2007, stock options with respect to 135,000 shares ofcommon stock were outstanding. All outstanding options and earned but unvestedPSUs were included in the computation of diluted earnings per share because allsuch instruments were dilutive.

 

**Note 8.  Business Segments**

 

TheCompany evaluates revenue, gross profit and inventory in three businesssegments:  (1) Networkinfrastructure products, which are used to build, repair and upgrade wirelesstelecommunications, computing and Internet networks, and generally complementradio frequency transmitting and switching equipment provided directly byoriginal equipment manufacturers (OEMs); (2) Mobile devices and accessoryproducts, which include data devices, pagers and two-way radios and relatedaccessories such as replacement batteries, cases, speakers, mobile amplifiers,power supplies, headsets, mounts, car antennas and various wireless datadevices; and (3) Installation, test and maintenance products, which areused to install, tune, maintain and repair wireless communicationsequipment.  Within the mobile devices andaccessory products line of business, the Company sells to both commercial andconsumer markets.  The networkinfrastructure and installation, test and maintenance lines of business sellprimarily to commercial markets. Beginning in fiscal year 2008, the Company expanded its regular reviewwithin each segment from three to four customer categories.  These categories are:  (1) commercial public carriers andnetwork operators; (2) commercial resellers; (3) commercialself-maintained users and governments; and (4) consumers.  These categories are described further below:

 

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

 

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

 

·                  Commercial Self-Maintained Users and Governments. Self-maintained users (SMUs) and government customers include commercialentities such as major utilities and transportation companies, repair centers,and federal agencies and state and local governments, including public safetyorganizations.

 

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

 

TheCompany measures segment performance based on segment gross profit.  The segment operations develop their productoffering, pricing and strategies, which are collaborative with one another andthe centralized sales and marketing function. Therefore, the Company does not segregate assets, other than inventory,for internal reporting, evaluating performance or allocating capital.  Product delivery revenue and certain cost ofsales expenses have been allocated to each segment based on a percentage ofrevenues and/or gross profit, as applicable. The Company’s goodwill at December 30, 2007 relates to acquisitionswithin its network infrastructure line of business.

 

 

 

 

 

 

9

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| *(Amounts in thousands)*                        | ** ** | **Network  Infrastructure** | ** ** | **Mobile Devices   and Accessories** | ** ** | **Installation, Test  and Maintenance** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|-----------|------------|
| **Fiscal Quarter ended December 30, 2007** |       |                             |       |                                 |       |                                    |       |      |       |
| Commercial Revenues:                            |       |                             |       |                                 |       |                                    |       |      |       |
| Public Carriers  and Network Operators          |       | $                                | 13,778     |                                 | $          | 527                                     |       | $         | 3,705      |   | $ | 18,010 |   |
| Resellers                                       |       | 17,084                           |       | 62,975                               |       | 2,318                                   |       | 82,377    |       |
| SMUs and  Governments                           |       | 13,719                           |       | 3,325                                |       | 15,856                                  |       | 32,900    |       |
| Total Commercial Revenues                       |       | 44,581                           |       | 66,827                               |       | 21,879                                  |       | 133,287   |       |
| Consumer Revenues                               |       | —                           |       | 2,445                                |       | —                                  |       | 2,445     |       |
| Total Revenues                                  |       | $                                | 44,581     |                                 | $          | 69,272                                  |       | $         | 21,879     |   | $ | 135,732 |   |
|                                            |       |                             |       |                                 |       |                                    |       |      |       |
| Commercial Gross Profit:                        |       |                             |       |                                 |       |                                    |       |      |       |
| Public Carriers  and Network Operators          |       | $                                | 3,247      |                                 | $          | 147                                     |       | $         | 822        |   | $ | 4,216 |   |
| Resellers                                       |       | 4,946                            |       | 12,116                               |       | 678                                     |       | 17,740    |       |
| SMUs and  Governments                           |       | 3,315                            |       | 973                                  |       | 3,260                                   |       | 7,548     |       |
| Total Commercial Gross Profit                   |       | 11,508                           |       | 13,236                               |       | 4,760                                   |       | 29,504    |       |
| Consumer Gross Profit                           |       | —                           |       | 898                                  |       | —                                  |       | 898       |       |
| Total Gross Profit                              |       | $                                | 11,508     |                                 | $          | 14,134                                  |       | $         | 4,760      |   | $ | 30,402 |   |
| Product Inventory                               |       | $                                | 22,256     |                                 | $          | 28,138                                  |       | $         | 4,077      |   | $ | 54,471 |   |

 
| **Fiscal Quarter ended December 24, 2006** |   |   |   |   |   |   |   |    |   |
|-------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|---------|--------|
| Commercial Revenues:                            |   |   |   |   |   |   |   |    |   |
| Public Carriers  and Network Operators          |   | $      | 14,965 |   | $      | 663    |   | $       | 3,434  |   | $ | 19,062 |   |
| Resellers                                       |   | 16,527 |   | 58,980 |   | 2,625  |   | 78,132  |   |
| SMUs and  Governments                           |   | 13,378 |   | 3,825  |   | 18,243 |   | 35,446  |   |
| Total Commercial Revenues                       |   | 44,870 |   | 63,468 |   | 24,302 |   | 132,640 |   |
| Consumer Revenues                               |   | — |   | 2,077  |   | — |   | 2,077   |   |
| Total Revenues                                  |   | $      | 44,870 |   | $      | 65,545 |   | $       | 24,302 |   | $ | 134,717 |   |
|                                            |   |   |   |   |   |   |   |    |   |
| Commercial Gross Profit:                        |   |   |   |   |   |   |   |    |   |
| Public Carriers  and Network Operators          |   | $      | 3,413  |   | $      | 199    |   | $       | 856    |   | $ | 4,468 |   |
| Resellers                                       |   | 4,242  |   | 13,628 |   | 712    |   | 18,582  |   |
| SMUs and  Governments                           |   | 3,203  |   | 1,417  |   | 4,428  |   | 9,048   |   |
| Total Commercial Gross Profit                   |   | 10,858 |   | 15,244 |   | 5,996  |   | 32,098  |   |
| Consumer Gross Profit                           |   | — |   | 780    |   | — |   | 780     |   |
| Total Gross Profit                              |   | $      | 10,858 |   | $      | 16,024 |   | $       | 5,996  |   | $ | 32,878 |   |
| Product Inventory                               |   | $      | 19,079 |   | $      | 21,442 |   | $       | 19,363 |   | $ | 59,884 |   |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10

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| *(Amounts in thousands**)***                 | ** ** | **Network Infrastructure** | ** ** | **Mobile Devices and Accessories** | ** ** | **Installation, Test and Maintenance** | ** ** | **Total**  | ** ** |
|----------------------------------------------|------------|----------------------------|------------|------------------------------------|------------|----------------------------------------|------------|------------|------------|
| **Nine Months ended December 30, 2007** | ** ** | ** **                 | ** ** | ** **                         | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Commercial Revenues**:**                     | ** ** | ** **                 | ** ** | ** **                         | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Public Carriers  and Network Operators       |       | $                          | 36,674     |                               | $          | 1,676                                  |       | $          | 9,731      |   | $ | 48,081 |   |
| Resellers                                    |       | 52,940                     |       | 180,901                            |       | 6,982                                  |       | 240,823    |       |
| SMUs and  Governments                        |       | 37,156                     |       | 10,088                             |       | 48,921                                 |       | 96,165     |       |
| Total Commercial Revenues                    |       | 126,770                    |       | 192,665                            |       | 65,634                                 |       | 385,069    |       |
| Consumer Revenues                            |       | —                     |       | 7,611                              |       | —                                 |       | 7,611      |       |
| Total Revenues                               |       | $                          | 126,770    |                               | $          | 200,276                                |       | $          | 65,634     |   | $ | 392,680 |   |
|                                         |       |                       |       |                               |       |                                   |       |       |       |
| Commercial Gross Profit:                     |       |                       |       |                               |       |                                   |       |       |       |
| Public Carriers  and Network Operators       |       | $                          | 8,725      |                               | $          | 471                                    |       | $          | 2,333      |   | $ | 11,529 |   |
| Resellers                                    |       | 13,664                     |       | 34,565                             |       | 2,141                                  |       | 50,370     |       |
| SMUs and  Governments                        |       | 9,349                      |       | 3,137                              |       | 10,048                                 |       | 22,534     |       |
| Total Commercial Gross Profit                |       | 31,738                     |       | 38,173                             |       | 14,522                                 |       | 84,433     |       |
| Consumer Gross Profit                        |       | —                     |       | 2,811                              |       | —                                 |       | 2,811      |       |
| Total Gross Profit                           |       | $                          | 31,738     |                               | $          | 40,984                                 |       | $          | 14,522     |   | $ | 87,244 |   |
|                                         |       |                       |       |                               |       |                                   |       |       |       |
| Product Inventory                            |       | $                          | 22,256     |                               | $          | 28,138                                 |       | $          | 4,077      |   | $ | 54,471 |   |

 
| **Nine Months ended December 24, 2006** |   |    |    |    |   |    |   |    |   |
|----------------------------------------------|--------|---------|---------|---------|--------|---------|--------|---------|--------|
| Commercial Revenues:                         |   |    |    |    |   |    |   |    |   |
| Public Carriers  and Network Operators       |   | $       | 39,166  |    | $      | 2,051   |   | $       | 10,757 |   | $ | 51,974 |   |
| Resellers                                    |   | 49,394  |    | 144,264 |   | 7,852   |   | 201,510 |   |
| SMUs and  Governments                        |   | 37,246  |    | 10,668  |   | 58,544  |   | 106,458 |   |
| Total Commercial Revenues                    |   | 125,806 |    | 156,983 |   | 77,153  |   | 359,942 |   |
| Consumer Revenues                            |   | —  |    | 5,371   |   | —  |   | 5,371   |   |
| Total Revenues                               |   | $       | 125,806 |    | $      | 162,354 |   | $       | 77,153 |   | $ | 365,313 |   |
|                                         |   |    |    |    |   |    |   |    |   |
| Commercial Gross Profit:                     |   |    |    |    |   |    |   |    |   |
| Public Carriers  and Network Operators       |   | $       | 9,103   |    | $      | 603     |   | $       | 2,600  |   | $ | 12,306 |   |
| Resellers                                    |   | 11,912  |    | 31,306  |   | 2,377   |   | 45,595  |   |
| SMUs and  Governments                        |   | 8,463   |    | 3,393   |   | 18,882  |   | 30,738  |   |
| Total Commercial Gross Profit                |   | 29,478  |    | 35,302  |   | 23,859  |   | 88,639  |   |
| Consumer Gross Profit                        |   | —  |    | 2,354   |   | —  |   | 2,354   |   |
| Total Gross Profit                           |   | $       | 29,478  |    | $      | 37,656  |   | $       | 23,859 |   | $ | 90,993 |   |
|                                         |   |    |    |    |   |    |   |    |   |
| Product Inventory                            |   | $       | 19,079  |    | $      | 21,442  |   | $       | 19,363 |   | $ | 59,884 |   |

# * *

# ***Note 9. Stock Buyback***

# * *

On April 28, 2003,the Company’s Board of Directors approved a stock buyback program.  As of December 30, 2007, the Board ofDirectors has authorized the purchase of 2,395,567 shares of outstanding commonstock under the stock buyback program.  Shares may be purchased from time to time in the openmarket, by block purchase, or through negotiated transactions, or possiblyother transactions managed by broker-dealers. No time limit has been set for completion or expiration of theprogram.  As of December 30, 2007,the Company had purchased 2,140,974 shares for approximately $28.3 million, oran average of $13.20 per share.  Of thetotal shares repurchased, 346,107 shares were repurchased in fiscal year 2008at an average price of $13.96 per share. As of December 30, 2007, 254,593 shares remained available forrepurchase under this program.

 

 

11

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

# * *

TheCompany’s future results could be negatively impacted by the loss of certaincustomer and/or vendor relationships. For the fiscal quarter and nine months ended December 30, 2007,sales of products to the Company’s top customer relationship, AT&T Mobility(formerly Cingular Wireless LLC), accounted for 24% and 25% of total revenues, respectively.  For the fiscal quarter and nine monthsended December 30, 2007, sales of products to the Company’s Nokia Inc.(Nokia) repair and replacement component relationship accounted for 8% of total revenues, respectively.  The Nokia relationship is a completesupply chain relationship and, therefore, the Company has no alternativesources of supply, and the Company’s purchases, and ultimately its resale ofthese products, is dependent upon the continuation of the Nokiarelationship.  The Company also sellsproducts other than Nokia repair and replacement materials to many of thesecustomers.  Absent this arrangement withNokia, the Company would maintain the ability to sell these other products tothese customers.

 

 

 

 

12

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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’s Form 10-Kfor the fiscal year ended April 1, 2007.

 

**Business Overview and Environment**

 

TESSCOTechnologies Incorporated (TESSCO or the Company) is a leading provider ofintegrated product and supply chain solutions to the professionals that design,build, run, maintain and use wireless mobile, fixed and in-buildingsystems.  Although we sell products tocustomers in over 100 countries, approximately 96% of our sales are made tocustomers in the United States.  We haveoperations and office facilities in Hunt Valley, Maryland, Reno, Nevada and SanAntonio, Texas.  Due to the diversity ofour business, we are not significantly affected by seasonality.  However, sales to our retailers generallypeak in our second and third quarters in preparation for the winter holidayseason.  Also, our network infrastructuresales are typically affected by weather conditions in the United States, especiallyin our fourth quarter.

 

We offer a wide range of products that are classified intothree business segments: network infrastructure; mobile devices andaccessories; and installation, test and maintenance.  Network infrastructure products, which aresold to our commercial customers, are used to build, repair and upgradewireless telecommunications, computing and Internet networks. Sales oftraditional network infrastructure products, such as cable, transmission linesand antennas are in part dependent on capital spending in the wirelesscommunications industry.  However, wehave also been growing our offering of wireless broadband and network equipmentproducts, which are not as dependent on the overall capital spending of theindustry.  Mobile devices and accessoryproducts include data devices, pagers and two-way radios and relatedaccessories.  Mobile devices andaccessory products are widely sold to commercial customers and consumers.  Commercial customers include retail stores,value-added resellers and dealers, as well as self-maintained users.  Consumers are primarily reached through ouraffinity partnerships, where we offer services including customized orderfulfillment, outsourced call centers, and building and maintaining privatelabel Internet sites. Approximately 50% of all of our mobile devices andaccessory product sales for the fiscal quarter and nine months ended December 30,2007 were generated from sales to AT&T Mobility (AT&T) (formerlyCingular Wireless LLC).  Installation,test and maintenance products, which are sold to our commercial customers, areused to install, tune, maintain and repair wireless communicationsequipment.  Approximately 50% of all ofour installation, test and maintenance sales for the fiscal quarter and nine monthsended December 30, 2007 were generated from the sales of replacement partsand materials for original equipment manufacturers, primarily Nokia, Inc.(Nokia).  The remainder of this segmentis made up of sophisticated analysis equipment and various frequency-, voltage-and power-measuring devices, as well as an assortment of tools, hardware andsupplies required by service technicians. Both our repair and replacement parts sales and consumer sales throughour affinity partnerships are reliant on relationships with a small number ofvendors.  Beginning in fiscal year2008, we expanded our regular review within each segment from three to fourcategories.  These categories are:  (1) commercial public carriers andnetwork operators; (2) commercial resellers; (3) commercialself-maintained users and governments; and (4) consumers.  These categories are described further below:

 

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

 

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

 

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

 

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

 

The wirelesscommunications distribution industry is competitive and fragmented, and iscomprised of several national distributors. In addition, many manufacturerssell direct. Barriers to entry for distributors are relatively low,particularly in 

 

 

13

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the mobile devicesand accessories market, and the risk of new competitors entering the market ishigh.  Consolidation of larger wirelesscarriers has and will most likely continue to impact our current and potentialcustomer base.  In addition, theagreements or arrangements with our customers or vendors looking to us forproduct and supply chain solutions are typically of limited duration and areterminable by either party upon several months or otherwise relatively shortnotice.  Our ability to maintain these relationshipsis subject to competitive pressures and challenges.  We believe, however, that our strength inservice, the breadth and depth of our product offering, our informationtechnology system, our large customer base and purchasing relationships with approximately350 manufacturers provide us with a significant competitive advantage over newentrants to the market.

 

Our third quarterrevenues increased by 0.8% compared to the third quarter of last year, but ourgross profits declined by 7.5%.  Thisrevenue growth was driven by our mobile devices and accessories commercial lineof business.  Gross profits increased inour network infrastructure commercial line of business as compared with thethird quarter of last year.  However, theincrease in gross profit from our network infrastructure line of business wasmore than offset by a decline in our installation, test and maintenance line ofbusiness due to gross profits from our Nokia relationship returning tohistorical levels as we had discussed in previous quarters, as well as adecline in gross profits from our mobile devices and accessories line ofbusiness.  This overall decrease in grossprofit, partially offset by a decrease in operating expenses, resulted in a6.5% decline in diluted earnings per share over the prior-year quarter.

 

 

14

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**Resultsof Operations**

 

The followingtable summarizes the unaudited results of our operations for the fiscal quarterand nine months ended December 30, 2007 and December 24, 2006:

 
| * *                                                   | ** ** | **Fiscal  Quarters Ended**       | ** ** | **Nine  Months Ended**           | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| *(Amounts  in thousands, except per share data)*           | ** ** | **December 30,  2007** | ** ** | **December 24,  2006** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** | **December 30,  2007** | ** ** | **December 24,  2006** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
| Commercial  Revenues                                       |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Network  Infrastructure:                                   |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers  and Network Operators                     |       | $                                | 13,778     |                             | $          | 14,965 |   | $ | (1,187 | ) | (7.9 | %) | $ | 36,674 |   | $ | 39,166 |   | $ | (2,492 | ) | (6.4 | %) |
| Resellers                                                  |       | 17,084                           |       | 16,527                           |       | 557 |   | 3.4 | % | 52,940 |   | 49,394 |   | 3,546 |   | 7.2 | % |
| SMUs and  Governments                                      |       | 13,719                           |       | 13,378                           |       | 341 |   | 2.5 | % | 37,156 |   | 37,246 |   | (90 | ) | (0.2 | %) |
| Total Network  Infrastructure                              |       | 44,581                           |       | 44,870                           |       | (289 | ) | (0.6 | %) | 126,770 |   | 125,806 |   | 964 |   | 0.8 | % |
| Mobile Devices  and Accessories:                           |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers  and Network Operators                     |       | 527                              |       | 663                              |       | (136 | ) | (20.5 | %) | 1,676 |   | 2,051 |   | (375 | ) | (18.3 | %) |
| Resellers                                                  |       | 62,975                           |       | 58,980                           |       | 3,995 |   | 6.8 | % | 180,901 |   | 144,264 |   | 36,637 |   | 25.4 | % |
| SMUs and  Governments                                      |       | 3,325                            |       | 3,825                            |       | (500 | ) | (13.1 | %) | 10,088 |   | 10,668 |   | (580 | ) | (5.4 | %) |
| Total Mobile  Devices and Accessories                      |       | 66,827                           |       | 63,468                           |       | 3,359 |   | 5.3 | % | 192,665 |   | 156,983 |   | 35,682 |   | 22.7 | % |
| Installation,  Test and Maintenance:                       |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers  and Network Operators                     |       | 3,705                            |       | 3,434                            |       | 271 |   | 7.9 | % | 9,731 |   | 10,757 |   | (1,026 | ) | (9.5 | %) |
| Resellers                                                  |       | 2,318                            |       | 2,625                            |       | (307 | ) | (11.7 | %) | 6,982 |   | 7,852 |   | (870 | ) | (11.1 | %) |
| SMUs and  Governments                                      |       | 15,856                           |       | 18,243                           |       | (2,387 | ) | (13.1 | %) | 48,921 |   | 58,544 |   | (9,623 | ) | (16.4 | %) |
| Total  Installation, Test and Maintenance                  |       | 21,879                           |       | 24,302                           |       | (2,423 | ) | (10.0 | %) | 65,634 |   | 77,153 |   | (11,519 | ) | (14.9 | %) |
| Total Commercial Revenues                                  |       | 133,287                          |       | 132,640                          |       | 647 |   | 0.5 | % | 385,069 |   | 359,942 |   | 25,127 |   | 7.0 | % |
| Consumer  Revenues— Mobile Devices and Accessories    |       | 2,445                            |       | 2,077                            |       | 368 |   | 17.7 | % | 7,611 |   | 5,371 |   | 2,240 |   | 41.7 | % |
| Total Revenues                                             |       | $                                | 135,732    |                             | $          | 134,717 |   | $ | 1,015 |   | 0.8 | % | $ | 392,680 |   | $ | 365,313 |   | $ | 27,367 |   | 7.5 | % |
| Commercial Gross  Profit                                   |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Network  Infrastructure:                                   |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers  and Network Operators                     |       | $                                | 3,247      |                             | $          | 3,413 |   | $ | (166 | ) | (4.9 | %) | $ | 8,725 |   | $ | 9,103 |   | $ | (378 | ) | (4.2 | %) |
| Resellers                                                  |       | 4,946                            |       | 4,242                            |       | 704 |   | 16.6 | % | 13,664 |   | 11,912 |   | 1,752 |   | 14.7 | % |
| SMUs and  Governments                                      |       | 3,315                            |       | 3,203                            |       | 112 |   | 3.5 | % | 9,349 |   | 8,463 |   | 886 |   | 10.5 | % |
| Total Network Infrastructure                               |       | 11,508                           |       | 10,858                           |       | 650 |   | 6.0 | % | 31,738 |   | 29,478 |   | 2,260 |   | 7.7 | % |
| Mobile Devices  and Accessories:                           |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers  and Network Operators                     |       | 147                              |       | 199                              |       | (52 | ) | (26.1 | %) | 471 |   | 603 |   | (132 | ) | (21.9 | %) |
| Resellers                                                  |       | 12,116                           |       | 13,628                           |       | (1,512 | ) | (11.1 | %) | 34,565 |   | 31,306 |   | 3,259 |   | 10.4 | % |
| SMUs and  Governments                                      |       | 973                              |       | 1,417                            |       | (444 | ) | (31.3 | %) | 3,137 |   | 3,393 |   | (256 | ) | (7.5 | %) |
| Total Mobile  Devices and Accessories                      |       | 13,236                           |       | 15,244                           |       | (2,008 | ) | (13.2 | %) | 38,173 |   | 35,302 |   | 2,871 |   | 8.1 | % |
| Installation,  Test and Maintenance:                       |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Public Carriers  and Network Operators                     |       | 822                              |       | 856                              |       | (34 | ) | (4.0 | %) | 2,333 |   | 2,600 |   | (267 | ) | (10.3 | %) |
| Resellers                                                  |       | 678                              |       | 712                              |       | (34 | ) | (4.8 | %) | 2,141 |   | 2,377 |   | (236 | ) | (9.9 | %) |
| SMUs and  Governments                                      |       | 3,260                            |       | 4,428                            |       | (1,168 | ) | (26.4 | %) | 10,048 |   | 18,882 |   | (8,834 | ) | (46.8 | %) |
| Total  Installation, Test and Maintenance                  |       | 4,760                            |       | 5,996                            |       | (1,236 | ) | (20.6 | %) | 14,522 |   | 23,859 |   | (9,337 | ) | (39.1 | %) |
| Total Commercial Gross Profit                              |       | 29,504                           |       | 32,098                           |       | (2,594 | ) | (8.1 | %) | 84,433 |   | 88,639 |   | (4,206 | ) | (4.7 | %) |
| Consumer Gross  Profit—Mobile Devices and Accessories |       | 898                              |       | 780                              |       | 118 |   | 15.1 | % | 2,811 |   | 2,354 |   | 457 |   | 19.4 | % |
| Total Gross Profit                                         |       | 30,402                           |       | 32,878                           |       | (2,476 | ) | (7.5 | %) | 87,244 |   | 90,993 |   | (3,749 | ) | (4.1 | %) |
| Selling, general  and administrative expenses              |       | 27,729                           |       | 29,730                           |       | (2,001 | ) | (6.7 | %) | 81,738 |   | 81,554 |   | 184 |   | 0.2 | % |
| Income from  operations                                    |       | 2,673                            |       | 3,148                            |       | (475 | ) | (15.1 | %) | 5,506 |   | 9,439 |   | (3,933 | ) | (41.7 | %) |
| Interest, net                                              |       | 160                              |       | 324                              |       | (164 | ) | (50.6 | %) | 337 |   | 660 |   | (323 | ) | (48.9 | %) |
| Income before  provision for income taxes                  |       | 2,513                            |       | 2,824                            |       | (311 | ) | (11.0 | %) | 5,169 |   | 8,779 |   | (3,610 | ) | (41.1 | %) |
| Provision for income taxes                                 |       | 978                              |       | 1,059                            |       | (81 | ) | (7.6 | %) | 2,052 |   | 3,305 |   | (1,253 | ) | (37.9 | %) |
| Net income                                                 |       | $                                | 1,535      |                             | $          | 1,765 |   | $ | (230 | ) | (13.0 | %) | $ | 3,117 |   | $ | 5,474 |   | $ | (2,357 | ) | (43.1 | %) |
| Diluted earnings  per share                                |       | $                                | 0.29       |                             | $          | 0.31 |   | $ | (0.02 | ) | (6.5 | %) | $ | 0.56 |   | $ | 0.89 |   | $ | (0.33 | ) | (37.1 | %) |

 

 

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**Third Quarter of Fiscal Year 2008Compared with Third Quarter of Fiscal Year 2007**

 

**Revenues. **Revenues for the third quarter of fiscal year 2008increased 0.8% as compared with the third quarter of fiscal year 2007,primarily due to a 0.5% growth in commercial revenues and, to a much lesserextent, a 17.7% increase in consumer revenues. While sales in our network infrastructure and installation, test, andmaintenance lines of business declined, sales in our mobile devices andaccessories line of business grew.

 

Networkinfrastructure sales decreased 0.6% as compared with the third quarter offiscal year 2007, as a result of lower sales of broadband products, primarilyto public carriers and network operators, partially offset by higher sales ofradio frequency propagation and site support products across all of our marketcategories.  Our overall decline in salesof network infrastructure products was in sales to public carriers, partiallyoffset by an increase in sales to resellers and SMUs and governments, which isthe result of our focus on diversification beyond the traditionalinfrastructure carrier customer.

 

Sales in themobile devices and accessories line of business increased 5.7% in the thirdquarter of fiscal year 2008, as compared with the same period last year.  The increase was due to a 5.3% increase incommercial sales and, to a much lesser extent, a 17.7% increase in consumersales.  The increase in commercialrevenues for mobile devices and accessories, which are sold primarily toresellers, but also to SMUs and governments and public carriers and networkoperators, was primarily due to increased sales to our smaller resellers andusers.  Sales to a large national tier-onecarrier declined by 3.4%.

 

Revenues from ourinstallation, test and maintenance line of business had a 10.0% decrease fromthe prior-year quarter, primarily due to a decrease in the sale of repaircomponents related to our major repair components relationship with Nokia.

 

**GrossProfit. **Gross profit for the third quarter of fiscal year 2008decreased 7.5% as compared with the third quarter of fiscal year 2007. Totalcommercial gross profit decreased 8.1%, while consumer gross profit increased15.1%.  Gross profit margin decreased to22.4% in the third quarter of fiscal year 2008 from 24.4% in third quarter offiscal year 2007.  Gross profit margin inour network infrastructure segment increased from 24.2% in the third quarter offiscal year 2007 to 25.8% in the third quarter of fiscal year 2008.  Gross profit margin in our mobile devices andaccessories segment decreased to 20.4% in the third quarter of this fiscal yearfrom 24.4% in the third quarter of last fiscal year.  This decline was primarily attributable tothe commercial gross profit margin for our mobile devices and accessories,which decreased to 19.8% in the third quarter of fiscal year 2008 from 24.0%for the third quarter of fiscal year 2007, principally due to product mix insales to a large tier-one carrier and other retail customers.  Consumer gross profit margin for our mobiledevices and accessories decreased to 36.7% in the third quarter of this fiscalyear from 37.6% for the third quarter of last fiscal year.  Gross profit margin in our installation, testand maintenance line of business decreased from 24.7% in the third quarter offiscal year 2007 to 21.8% in the third quarter of fiscal year 2008.  This decline was due primarily to the returnto historical levels of gross profit attributable to our Nokia repair andreplacement parts relationship as a result of price changes as we discussed onprevious occasions.  Generally, our grossmargins by product within these segments have been sustained, except as notedabove for gross margins attributable to our relationships with a large tier-onecarrier and Nokia, and generally these variations are related to sales mixwithin the segment product offerings.  Weaccount for inventory at the lower of cost or market, and as a result,write-offs/write-downs occur due to damage, deterioration, obsolescence,changes in prices and other causes.

 

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

 

As total revenuesand gross profits from larger customer and vendor relationships, includingAT&T and Nokia, increase, we occasionally experience and expect to continueto experience pricing pressures that may adversely affect future results. 

 

 

 

 

 

 

 

 

 

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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 expenses decreased by 6.7% in the third quarter offiscal year 2008 as compared with the third quarter of fiscal year 2007.  Selling, general and administrative expensesas a percentage of revenues decreased to 20.4% in the third quarter of fiscalyear 2008 from 22.1% in the third quarter of fiscal year 2007.  The largest factors contributing to thedecrease in total selling, general and administrative expenses were decreasedmarketing, sales promotion, freight expense and bonus accruals, during thethird quarter of fiscal year 2008.

 

Marketing andsales promotion expenses decreased by approximately $1.8 million in the thirdquarter of fiscal year 2008 as compared with the third quarter of fiscal year2007, primarily due to lower racks and graphics expense associated with ourlarge tier-one carrier in the third quarter of fiscal year 2008, as well asdecreased expense for media and advertising campaigns.

 

Freight expense decreasedby approximately $468,500 due to increased productivity in our freightoperations.

 

Labor expenses related tobusiness generation and fulfillment activities increased over the prior-yearquarter.  These increases are reflectiveof our increased focus on our commercial business.  However, the increase in labor cost wasoffset by decreased accruals related to our bonus program.  Total labor costs, including benefits,increased by approximately $1.1 million from the third quarter of fiscal year2007 to the third quarter of fiscal year 2008, offset by an approximately $1.4million decrease in our bonus expense in the third quarter of fiscal year 2008as compared with the third quarter of fiscal year 2007.

 

We continually evaluatethe credit worthiness of our existing customer receivable portfolio and providean appropriate reserve based on this evaluation.  We also evaluate the credit worthiness ofprospective customers and make decisions regarding extension of credit terms tosuch prospects based on this evaluation. Accordingly, we recorded a provision for bad debts of$258,100 and $302,600 for the third quarter ended December 30, 2007 and December 24,2006, respectively.

 

**Interest,Net.**  Net interest expense decreased from $323,800in the third quarter of fiscal year 2007 to $161,000 in the third quarter offiscal year 2008, primarily due to decreased average borrowings on ourrevolving line of credit facility as well as decreased interest rates.

 

**IncomeTaxes, Net Income and Diluted Earnings per Share.** Theeffective tax rate in the third quarter of fiscal year 2008 was 38.9% ascompared with 37.5% in the third quarter of fiscal year 2007.  The increase in the tax rate is primarilyattributable to an increase in non-deductible expenses as a percentage of income,as well as changes in our state tax effective rate.  As a result of the factors discussed above,net income and diluted earnings per share for the third quarter of fiscal year2008 decreased 13.0% and 6.5%, respectively, compared to the prior-year quarter.

 

**First Nine Months of Fiscal Year 2008 Comparedwith First Nine Months of Fiscal Year 2007**

 

**Revenues. **Revenues for the first nine months of fiscal year 2008increased 7.5% as compared with the first nine months of fiscal year 2007,primarily due to a 7.0% growth in commercial revenues and, to a much lesserextent, a 41.7% increase in consumer revenues. While we grew sales in our network infrastructure and mobile devices andaccessories lines of business, sales in our installation, test and maintenanceline of business decreased.

 

Networkinfrastructure sales increased 0.8% as compared with the first nine months offiscal year 2007, primarily due to an increase in sales of radio frequencyproducts primarily to resellers, partially offset by a decline in revenues ofbroadband products primarily in the networks carriers and public operatorsmarket category.  Our growth in sales ofnetwork infrastructure product was in sales to resellers, as we have focused ondiversification beyond the traditional infrastructure carrier customer.

 

Sales in themobile devices and accessories line of business increased 23.4% in the firstnine months of fiscal year 2008, as compared with the prior-year period.  The increase was due to a 22.7% increase incommercial sales, and, to a much lesser extent, a 41.7% increase in consumersales.  The increase in commercialrevenues for mobile devices and accessories, 

 

 

 

 

 

 

 

 

 

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which are soldprimarily to resellers, but also to SMUs and governments and public carriersand network operators, was primarily due to increased sales to a large nationaltier-one carrier, as well as other smaller resellers and users.

 

Revenues from ourinstallation, test and maintenance line of business had a 14.9% decrease fromthe prior year, primarily due to a large decrease in sales of repair partsrelated to our major repair components relationship with Nokia.

 

**GrossProfit. **Gross profit for the first nine months of fiscal year2008 decreased 4.1% as compared with the first nine months of fiscal year 2007.Total commercial gross profit decreased 4.7%, while consumer gross profitincreased 19.4% over the prior year. Gross profit margin decreased to 22.2% in the first nine months offiscal year 2008 from 24.9% in the first nine months of fiscal year 2007.  Gross profit margin in our networkinfrastructure segment increased to 25.0% in the first nine months of fiscalyear 2008 from 23.4%in the first nine months of 2007.  In our installation, test and maintenancesegment, gross profit margin decreased to 22.1% in the first nine months offiscal year 2008 from 30.9% in the first nine months of fiscal year 2007,primarily due to price changes related to our Nokia relationship.  Gross profit margin in our mobile devices andaccessories segment decreased to 20.5% in the first nine months of fiscal year2008 from 23.2% in the first nine months of fiscal year 2007, primarily due toproduct mix in sales to a large tier-one carrier.  Commercial gross profit margin for our mobiledevices and accessories decreased to 19.8% in the first nine months of fiscalyear 2008 from 22.5% for the first nine months of fiscal year 2007.  Consumer gross profit margin for our mobiledevices and accessories line of business decreased to 36.9% in the first ninemonths of this fiscal year from 43.8% for the first nine months of last fiscalyear.  Generally, our gross margins byproduct within these segments have been sustained, except as noted above forgross profits attributable to our relationships with a large tier-one carrierand Nokia, and generally these variations are related to sales mix within thesegment product offerings.  We accountfor inventory at the lower of cost or market, and as a result,write-offs/write-downs occur due to damage, deterioration, obsolescence,changes in prices and other causes.

 

**Selling,General and Administrative Expenses.** Total selling,general and administrative expenses increased by 0.2% in the first nine monthsof fiscal year 2008 as compared with the first nine months of fiscal year2007.  Selling, general andadministrative expenses as a percentage of revenues decreased to 20.8% in thefirst nine months of fiscal year 2008 from 22.3% in the first nine months offiscal year 2007.  The largest factors contributingto the increase in total selling, general and administrative expenses wereincreased occupancy costs and labor expenses related to business generationactivities in support of our continued increased focus on our commercialbusiness, partially offset by decreased marketing and sales promotion expensesas well as decreased bonus accruals during the first nine months of fiscal year2008.

 

Occupancy costsincreased by approximately $717,700 in the first nine months of fiscal year2008 as compared with the first nine months of fiscal year 2007, primarily dueto rent and building maintenance costs related to our lease arrangement foradditional office and warehouse space in Hunt Valley, Maryland beginning July 1,2007.

 

Labor expenses related tobusiness generation and fulfillment activities increased over the prioryear.  These increases are reflective ofour increased focus on our commercial business. The increase in labor cost has been partially offset by decreasedaccruals related to our bonus program. Total labor costs, including benefits, increased by approximately $4.6million from the first nine months of fiscal year 2007 to the first nine monthsof fiscal year 2008.  This increase waspartially offset by an approximately $4.4 million decrease in our bonus expensein the first nine months of fiscal year 2008 as compared with the first ninemonths of fiscal year 2007.

 

Marketing andsales promotion expenses decreased by approximately $1.7 million in the firstnine months of fiscal year 2008 as compared with the first nine months offiscal year 2007, primarily due to lower racks and graphics expense associatedwith our large tier-one carrier in the first nine months of fiscal year 2008 aswell as decreased expense for media and advertising campaigns.

 

We continually evaluatethe credit worthiness of our existing customer receivable portfolio and providean appropriate reserve based on this evaluation.  We also evaluate the credit worthiness ofprospective customers and make decisions regarding extension of credit terms tosuch prospects based on this evaluation. Accordingly, we recorded a provision for bad debts of$566,200 and $974,600 for the first nine months of fiscal year 2008 and fiscalyear 2007, respectively, primarily due to improved collections of outstandingaccounts.

 

 

 

 

 

 

 

 

 

 

 

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**Interest,Net.**  Net interest expense decreased from $659,600in the first nine months of fiscal year 2007 to $337,800 in the first ninemonths of fiscal year 2008, primarily due to decreased average borrowings onour revolving line of credit facility as well as decreased interest rates.

 

**IncomeTaxes, Net Income and Diluted Earnings per Share.** The effective tax rate in the first ninemonths of fiscal year 2008 was 39.7% as compared with 37.6% in the first ninemonths of fiscal year 2007.  The increasein the tax rate is primarily attributable to changes in our relationshipbetween non-deductible expenses and taxable income, as well as changes in ourstate tax effective rate.  As a result ofthe factors discussed above, net income and diluted earnings per share for thefirst nine months of fiscal year 2008 decreased 43.1% and 37.1%, respectively,compared to the prior year.

 

**Liquidity and Capital Resources**

 

| ** **                                            | ** ** | **Nine Months Ended**            | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **December 30,  2007** | ** ** | **December 24,  2006** | ** ** |
| Cash flow  provided by operating activities           |       | $                                | 472,800    |   | $ | 14,938,600 |   |
| Cash flow used  in investing activities               |       | (4,612,900                       | )          | (7,478,100 | ) |
| Cash flow  provided by (used in) financing activities |       | 1,252,000                        |       | (9,747,400 | ) |
| Net decrease in  cash and cash equivalents            |       | $                                | (2,888,100 | ) | $ | (2,286,900 | ) |

 

We generated $0.5million of net cash from operating activities in the first nine months offiscal year 2008 compared with $14.9 million in the first nine months of fiscalyear 2007.  In the first nine months offiscal year 2008, our cash inflow from operating activities was primarilydriven by net income, net of certain non-cash elements such as deprecation andamortization and non-cash stock compensation, offset by a decrease in cash dueto changes in net working capital.  Theworking capital change primarily consisted of significant inventory purchasesas we increased our stocked product offering, including wireless broadbandproducts and phone accessories, as well as an increase in trade accountsreceivable due to the timing of sales and collections, partially offset byincreased accounts payable as a result of the increase in inventory.

 

Capitalexpenditures of $2.3 million in the first nine months of fiscal year 2008 weredown from expenditures of $2.9 million in the first nine months of fiscal year2007.  In both periods, capitalexpenditures primarily consisted of investment in information technology and,in fiscal year 2007, training equipment.

 

OnApril 21, 2006, we acquired substantially all the non-cash net assets ofTerraWave Solutions, Ltd. and its commonly owned affiliate, GigaWaveTechnologies, Ltd. for an initial cash payment of approximately $3.8 million,and additional cash earn-out payments over a four-year period, contingent onthe achievement of certain minimum earnings thresholds ($1.5 million of the$3.8 million cash amount paid at closing is a non-refundable prepayment againstfuture earn-out payments, if any, amortizable over the four-year period).  To the extent that certain minimum earningsthresholds are not achieved, we will not be able to recover thisprepayment.  The maximum amount ofcontingent future earn-out payments (after subtracting the $1.5 millionprepayment) is $15.5 million.  Contingentpayments made under the terms of the purchase agreement are treated as anadditional cost of the acquired businesses and additional goodwill has been andwill continue to be recorded, if earnings targets are achieved.  For the nine month period ended December 30,2007, approximately $1.7 million was paid for additional earn-out paymentsbased on the achievement of certain earnings thresholds in accordance with theterms of the purchase agreement.  As of December 30,2007, an additional earn-out of $810,900 has been accrued and is anticipated tobe paid, along with any additional amounts earned, in the first quarter offiscal year 2009.  In accordance with theacquisition agreement, these earn-out amounts are net of $375,000 (one quarterof the $1.5 million prepayment) of the non-refundable prepayment against futureearn-out payments discussed above.

 

On July 2, 2007, we acquired the net assets andbusiness of NetForce Solutions, Inc. (NetForce), a provider of technicaland sales training solutions to wireless, telecommunications, and networkingindustries.  The purchase includedsubstantially all of the non-cash business assets for an initial cash paymentof approximately $650,000 and additional cash earn-out payments of up toapproximately $2.8 million over a four-year period, contingent on theachievement of certain earnings thresholds. As of December 30, 2007, there is noaccrual for additional earn-out payments, because applicable fiscal year 2008targets have not been met as of December 30, 2007.

 

 

 

 

 

 

 

 

 

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Net cash provided byfinancing activities was $1.3 million in the first nine months of fiscal year2008 compared with a net cash outflow from financing activities of $9.7 millionfor the first nine months of fiscal year 2007. For fiscal year 2008, our cash provided by financing activities wasprimarily due to net borrowings on our revolving line of credit and excess taxbenefits from stock-based compensation, partially offset by the purchase oftreasury stock.  For fiscal year 2007,our cash outflow from financing activities was primarily related to treasurystock purchases, partially offset by net borrowings on our revolving line ofcredit.  During the first nine months offiscal year 2008, we repurchased 346,107 shares of our outstanding common stockpursuant to our stock buyback program, compared with 1,043,813 shares purchasedduring the first nine months of fiscal year 2007.  From the beginning of our stock buybackprogram (the first quarter of fiscal year 2004), through the end of the thirdquarter of fiscal year 2008, a total of 2,140,974 shares have been purchasedunder this program for approximately $28.3 million, or an average price of$13.20 per share.  The Board of Directorshas authorized the purchase of up to 2,395,567 shares in the aggregate, andtherefore, 254,593 shares remained available to be purchased as of the end ofthe third quarter of fiscal year 2008. We expect to fund future purchases, if any, from working capital and/orour revolving credit facility.  Notimetable has been set for the completion or expiration of this program.

 

We believe that ourexisting cash, payments from customers, and availability under our revolvingline of credit facility will be sufficient to support our operations for atleast the next twelve months.  Tominimize interest expense, our policy is to use excess available cash to paydown any balance on our revolving line of credit facility.  In doing so, the balance on our revolvingline of credit facility could increase depending on our working capital andother cash needs.  If we were to undertakean acquisition or other major capital purchases that require funds in excess ofits existing sources of liquidity, we would look to sources of funding fromadditional credit facilities, 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.

 

We expect to see adecrease in net cash flow from operations during the fourth quarter of fiscalyear 2008.  This is in part a result ofthe increase in inventory that continued in the third quarter which will bepaid during the fourth quarter.

 

On May 31,2007, we replaced our previously existing $30 million revolving line of creditfacility with a new $50 million revolving line of credit facility with bothSunTrust Bank and Wachovia Bank, N.A. The previous facility was established in September 2003 and had aterm expiring in September 2007, was unsecured and had provided formonthly payments of interest accruing at a LIBOR rate plus an applicable marginranging from 1.5% to 2.0%.  The newfacility has a term expiring May 2010, with interest payable monthly atthe LIBOR rate plus an applicable margin, which ranges from 1.25% to2.75%.  Like the replaced facility,borrowing availability under this new facility is determined in accordance witha borrowing base.  This new facilityincludes financial covenants, including a minimum tangible net worth, minimumcash flow coverage of debt service, and a maximum funded debt to EBITDAratio.  These financial covenants alsoapply to a separate but related term loan secured by our Hunt Valley, Marylandfacility.  The terms applicable to thenew revolving line of credit facility and term loan also limit our ability toengage in certain transactions or activities, including (but not limited to)investments and acquisitions, sales of assets, payment of dividends, issuanceof additional debt and other matters.  Asof December 30, 2007, we had $43.9 million available on our revolving lineof credit facility subject to the limitations imposed by the borrowing base andour continued compliance with the other applicable terms, including the covenantsdiscussed above.

 

On May 1,2007, we entered into a Second Amendment of Agreement of Lease with AtriumBuilding LLC, which among other things, provided for an extension, from November 30,2007 to December 31, 2012, of the lease term provided for under theAgreement of Lease, dated November 3, 2003, as previously amended January 23,2007, under which we lease approximately 94,000 square feet in Timonium,Maryland, where our corporate and administrative offices are located.  Therental rate ranges from $124,700 to $144,600 per month at the close of theextended term.  The contractual cashobligations under this amendment as of December 30, 2007 are $374,200,$3,068,900, $3,255,800 and $1,267,700 for fiscal years 2008, 2009 through 2010,2011 through 2012, and thereafter, respectively.

 

On June 1,2007, we entered into a Lease with MERRITT/BAVAR-VA, LLC, under which we leaseapproximately 66,000 square feet of office and warehouse space in Hunt Valley,Maryland, adjacent to our Global Logistics Center, for a term beginning July 1,2007 and expiring September 30, 2011. The monthly rental fee ranges from $35,700 to $38,500 throughout thelease term. The contractual cash obligations under this agreement as of December 30,2007 are $107,200, $882,300 and $611,700 for fiscal years 2008, 2009 through2010, and 2011 through 2012, respectively.

 

 

 

 

 

 

 

 

 

 

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**Recent Accounting Pronouncements**

 

EffectiveApril 2, 2007, we adopted Financial Accounting Standards Board (FASB)Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in IncomeTaxes.”  FIN 48 clarifies the accounting for incometaxes by prescribing the minimum recognition threshold a tax position isrequired to meet before being recognized in the financial statements.  FIN 48 also provides guidance onderecognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure and transition. As a result of the adoption ofFIN 48, we recognized a $72,100 decrease in beginning retained earnings as of April 2,2007.  As of April 2, 2007, we hadtotal gross unrecognized tax benefits of approximately $319,000, all of which,if recognized, would favorably affect the effective income tax rate in futureperiods.

 

In September 2006, the FASB issued Statement ofFinancial Accounting Standard (SFAS) No. 157, “Fair Value Measurements,”which provides guidance for using fair value to measure assets andliabilities.  The standard also respondsto investors’ 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. SFAS No. 157 is effective for fiscal years beginning after November 15,2007, and interim periods within those fiscal years.  In February 2008, the FASB partiallydeferred the effective date of SFAS No. 157 for certain non-financialassets and liabilities that are recognized or disclosed at fair value in thefinancial statements on a nonrecurring basis until November 15, 2008.  We are reviewing SFAS No. 157 todetermine the impact of adoption on our financial statements.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair ValueOption for Financial Assets and Financial Liabilities — Including an Amendmentof FASB Statement No. 115.”  SFAS No. 159permits an entity to measure many financial instruments and certain other itemsat fair value that are not currently required to be measured at fairvalue.  Entities that elect the fairvalue option will report unrealized gains and losses in earnings at eachsubsequent reporting date.  SFAS No. 159is effective for fiscal years beginning after November 15, 2007.  We are reviewing SFAS No. 159 todetermine the impact of adoption on our financial statements.

 

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

 

**Critical Accounting Policies and Estimates**

 

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

 

For a detaileddiscussion on our critical accounting policies, please refer to our AnnualReport on Form 10-K for the fiscal year ended April 1, 2007.

 

**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 

 

 

 

 

 

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statements involvea number of risks and uncertainties. Our actual results may differ materiallyfrom those described in or contemplated by any such forward-looking statementfor a variety of reasons, including those risks identified in our most recentAnnual Report on Form 10-K and other periodic reports filed with theSecurities and Exchange Commission, under the heading “Risk Factors” andotherwise. Consequently, the reader is cautioned to consider allforward-looking statements in light of the risks to which 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 the customers’, vendors’ and affinity partners’ business; economicconditions that may impact customers’ ability to fund or pay for the purchaseof our products and services, including credit risk; our dependence on arelatively small number of suppliers and vendors, which could hamper ourability to maintain appropriate inventory levels and meet customer demand;failure of our information technology system or distribution system; technologychanges in the wireless communications industry, which could lead tosignificant inventory obsolescence and/or our inability to offer key productsthat our customers demand; third-party freight carrier interruption; increasedcompetition from competitors, including manufacturers or national and regionaldistributors of the products we sell and the absence of significant barriers toentry which could result in pricing and other pressures on profitability andmarket share; our inability to access capital and obtain financing as and whenneeded; transitional and other risks associated with acquisitions of companiesthat we may undertake in an effort to expand our business; the possibilitythat, for unforeseen reasons, we may be delayed in entering into or performing,or may fail to enter into or perform, anticipated contracts or may otherwise bedelayed in realizing or fail to realize anticipated revenues or anticipatedsavings; our inability to protect certain intellectual property, includingsystems and technologies on which we rely; and our inability to hire or retainfor any reason our key professionals, management and staff.

 

**Available Information**

 

Our Internet Website address is: www.tessco.com. We make available free of charge through ourWeb site, our annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and amendments to those reports filed or furnishedpursuant to Section 13 or 15(d) of the Exchange Act as soon asreasonably practicable after such documents are electronically filed with, orfurnished to, the Securities and Exchange Commission.  Also available on our Web site is our Code ofBusiness Conduct and Ethics.

 

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

 

In October 2005,we entered into an interest rate swap agreement on our existing bank termloan.  We believe our exposure to marketrisks, including exchange rate risk, interest rate risk and commodity pricerisk, is not material at the present time.

 

**Item 4T.  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 thesecontrols and procedures required by Rules 13a-15(b) or 15d-15(b) ofthe Exchange Act, the Company’s management, including the CEO and CFO, haveconcluded that, as of the end of the period covered by this quarterly report,the Company’s disclosure controls and procedures were 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.

 

 

 

 

 

 

 

 

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|         |
|--------------|
| **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 anylawsuits or claims currently pending against the Company, individually or inthe aggregate, are material, or will have a material adverse affect on ourfinancial condition or results of operations.

 
| **Item  1A.** | **Risk  Factors.** |
|---------------|--------------------|

 

There were no material changes in the risk factors previously disclosedin the Company’s Annual Report on Form 10-K for the fiscal year ended April 1,2007, except that we now revise the paragraph included among those risk factorsrelated to ownership of our common stock under the heading **“*It may be difficult for athird party to acquire the Company, which could affect the price of our commonstock”*** to read as follows.

 

***It may be difficultfor a third party to acquire the Company, which could affect the price of ourcommon stock.***

 

                Certain provisionsof our certificate of incorporation and bylaws, certain arrangements to whichwe are party, and applicable provisions of Delaware corporate law may each makeit more difficult for or may prevent a third party from acquiring control of usor changing our Board of Directors and management.  These provisions includea classified Board of Directors with staggered three-year terms, advance noticebylaws, and limitations on the removal of directors other than for cause, andthen only upon the affirmative vote of 75% of our outstanding commonstock.   In addition, on February 1,2008, our Board of Directors adopted a stockholder rights plan pursuant towhich one preferred stock purchase right was distributed on each common shareheld of record as of the close of business on February 11, 2008.  The rights become exercisable under certaincircumstances following the announcement that any person has acquired 20% ormore of our common stock, or the announcement that any person has commenced atender offer for 20% of our common stock (in each case, with certain limitedexceptions).  Under specified conditions,each right (other than those held by the person or persons acquiring or makinga tender offer for our stock, which rights become void under the rights plan)will entitle the holder to purchase, at the exercise price provided for underthe plan, our common stock (or if we are acquired in a merger or other businesscombination, common stock of the acquirer) having a then current value of twotimes the exercise price.  In addition,on February 1, 2008 our Board of Directors amended our bylaws to provide that aspecial meeting of stockholders shall be called upon a request in writing bythe holders of stock of all classes representing at least 50% of the votespossessed by all classes then issued, outstanding and entitled to vote at themeeting.  We are also afforded theprotections of Section 203 of the Delaware General Corporation Law, which willprevent us from engaging in a business combination with a person who acquiresat least 15% of our common stock for a period of three years from the date suchperson acquired such common stock, unless Board of Director or shareholderapproval were obtained.  Any delay or prevention of a change of controltransaction or changes in our Board of Directors or management could deter potentialacquirers or prevent the completion of a transaction in which our shareholderscould receive a substantial premium over the then current market price fortheir shares.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

** **

The following table sets forth information with respect to purchases ofTESSCO common stock by the Company or any affiliated purchasers during thethird quarter of fiscal year 2008.

 

**IssuerPurchases of Equity Securities**

** **

| **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)** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| October 1, 2007 through October 28, 2007   |       | —                                         |       | $                                          | N/A        |                                                                                                  | —     |                                                                                                    | 254,593    |   |
| October 29, 2007 through December 2, 2007  |       | —                                         |       | N/A                                        |       | —                                                                                                |       | 254,593                                                                                                 |       |
| December 3, 2007 through December 30, 2007 |       | —                                         |       | N/A                                        |       | —                                                                                                |       | 254,593                                                                                                 |       |
| Total                                                |       | —                                         |       | $                                          | N/A        |                                                                                                  | —     |                                                                                                    | 254,593    |   |

 

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| (1) | Periods  indicated are fiscal accounting months for the third quarter of fiscal year  2008. |
|-----|---------------------------------------------------------------------------------------------|
| (2) | Values are as of  the end of the fiscal accounting month or quarter, as applicable.         |

 

On April 28,2003, our Board of Directors announced a stock buyback program.  As of December 30, 2007, the Board ofDirectors has authorized the purchase of 2,395,567 shares of outstanding commonstock under the stock buyback program. During the third quarter of 2008, the Company did not repurchase anyshares of its common stock.  As of December 30,2007, we had purchased an aggregate of 2,140,974 shares of our outstandingcommon stock pursuant to this program for approximately $28.3 million, or anaverage price of $13.20 per share. Accordingly, as of December 30, 2007, 254,593 shares remainedavailable for repurchase.  Shares may bepurchased from time to time under this program in the open market, by blockpurchase, or through negotiated transactions, or possibly other transactionsmanaged by broker-dealers.  No timetablehas been set for completion or expiration of the program.

 
| **Item 3.** | **Defaults  Upon Senior Securities.** |
|-------------|---------------------------------------|

** **

None.

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

 

None.

 
| **Item 5.** | **Other  Information.** |
|-------------|-------------------------|

 

None.

 
| **Item 6.** | **Exhibits.** |
|-------------|---------------|

 

(a)     EXHIBITS:

 
| 31.1 |   | Rule 15d-14(a) Certification  of Robert B. Barnhill, Jr., Chief Executive Officer. |
|------|--------|---------------------------------------------------------------------------------------------------|
| 31.2 |   | Rule 15d-14(a) Certification  of David M. Young, Chief Financial Officer.               |
| 32.1 |   | Section 1350 Certification of Robert B.  Barnhill, Jr., Chief Executive Officer.        |
| 32.2 |   | 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:  | February 13, 2008 |   | By:                               | /s/ David M. Young |   |
|   |                   |   |                              | David  M. Young |   |
|   |                   |   |                              | Chief Financial Officer |   |
|   |                   |   |                              | (principal  financial and accounting officer) |   |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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