Annual Reports

  • 10-K (May 31, 2013)
  • 10-K (May 29, 2013)
  • 10-K (Jun 1, 2012)
  • 10-K (May 31, 2012)
  • 10-K (May 24, 2011)
  • 10-K (May 27, 2010)

 
Quarterly Reports

 
8-K

 
Other

TESSCO Technologies 10-K 2011
form10k.htm






UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________

FORM 10-K

  x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 27, 2011

  o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM        TO     

Commission file number 0-24746

                          Logo
TESSCO Technologies Incorporated
(Exact name of registrant as specified in its charter)

 
 DELAWARE    52-0729657
(State or other jurisdiction of 
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
     
 11126 McCormick Road, Hunt Valley, Maryland     21031
 (Address of principal executive offices)     (Zip Code)
 
Registrant’s telephone number, including area code(410) 229-1000
 
Securities registered pursuant to Section 12(b) of the Act:
 
 Title of each class    Name of each exchange on which registered
 Common Stock, $0.01 par value     NASDAQ Global Market
 
Securities registered pursuant to Section 12(g) of the Act:
None


    Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Act). Yes o No x
 
    Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o No x
 
    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  xNo o
 
    Indicate by check mark whether the registrant submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
 
    Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or other information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
 
    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
  
    Large accelerated filer  o Accelerated filer  o Non-accelerated filer o Smaller reporting company x
 
    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x
 
    The aggregate market value of Common Stock, $0.01 par value, held by non-affiliates of the registrant based on the closing sales price of the Common Stock as quoted on the NASDAQ Global Market as of September 26, 2010, was $77,988,214.

    The number of shares of the registrant's Common Stock, $0.01 par value, outstanding as of May 18, 2011, was 7,627,273.











   
 Business  3
 Risk Factors  11
 Unresolved Staff Comments  19
 Properties  20
 Legal Proceedings  20
    Item 4.  (Removed and Reserved)  20
   
 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  21
 Selected Financial Data  23
 Management's Discussion and Analysis of Financial Condition and Results of Operations  25
    Item 7A.  Quantitative and Qualitative Disclosures About Market Risk  38
 Financial Statements and Supplementary Data  39
 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure  66
 Controls and Procedures  66
 Other Information  68
   
 Directors, Executive Officers and Corporate Governance  68
 Executive Compensation  68
 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters  68
 Certain Relationships and Related Transactions, and Director Independence  68
 Principal Accounting Fees and Services  68
   
 Exhibits, Financial Statement Schedule  68
 Valuation and Qualifying Accounts  73
   74







General
 
TESSCO Technologies Incorporated (TESSCO, we, or the Company) is Your Total Source® to build, use and maintain wireless systems. The convergence of wireless and the internet is revolutionizing the way the world lives and works. New systems and applications are creating challenges and opportunities at an unprecedented rate. TESSCO is there, thinking in new ways for exceptional outcomes. TESSCO architects and delivers, with innovation, productivity and speed, the product and value chain solutions to organizations responsible for building, operating and maintaining wireless voice, data and video systems. TESSCO is committed to delivering, fast and complete, the needs of wireless system operators, contractors, resellers and self-maintained utility, transportation, enterprise and government organizations.

We provide our customers with product and value chain solutions for a large variety of applications, including:
 
 
·
Mobile Radio and Unified Communications
 
·
Base Station Infrastructure
 
·
Wire Area Networks
 
·
Local Area Network
 
·
Security and Surveillance Networks
 
·
Remote Monitoring and Control
 
·
Mobility and User Devices

The products that we use in these solutions come from world class manufacturers and fall within the following broad business segment categories: network infrastructure, mobile devices and accessories, and installation, test and maintenance products.

Our operational platform, which we refer to as our Knowledge, Configuration, Delivery and Control System (KCDCTM), allows customers and manufacturers the opportunity to streamline the supply chain process and lower total inventories and costs by providing guaranteed availability and complete, on-time delivery to the point of use.

We began our “total source” operations in 1982, reincorporated as a Delaware corporation in 1987, and have been listed on the NASDAQ Global Market (symbol: TESS), since 1994. Today, we operate 24 hours a day, seven days a week, under ISO 9001:2008 registration.

We currently serve an average of approximately 12,700 commercial customers per month including a diversified mix of carrier and public network operators, tower owners, program managers, contractors and integrators, wireless internet service providers, industrial and enterprise self-maintained users (including railroads, utilities, mining operators, oil and gas operators and technicians), governments, manufacturers, repair centers, retailers, dealers and value-added resellers. Additionally, we currently serve an average of approximately 700 consumers per month, including through affinity partners and direct-to-consumer programs.

On May 26, 2010, we issued a stock dividend in order to effect a three-for-two stock split of our common stock. The share prices and number of shares included in this Annual Report on Form 10-K prior to the May 26, 2010 stock split have been retroactively restated to reflect the stock dividend for all periods presented. The references from time to time herein to “split adjusted” shares is for convenience of the reader; and the absence in some places of such reference should not be construed to mean that such numbers or values are not “split adjusted,” unless noted as such.
 
 

 
Products and Services

We principally offer competitively priced, manufacturer brand-name products, ranging from simple hardware items to sophisticated test equipment, with per item prices ranging from less than $1 to approximately $75,000 and gross profit margins ranging from less than 5% to over 95%. We offer products classified into our three business segments: network infrastructure, mobile devices and accessories, and installation, test and maintenance products, which accounted for approximately 37%, 55% and 8% of fiscal year 2011 revenues, respectively. Network infrastructure products are used to build, repair and upgrade wireless telecommunications, computing and Internet networks. Products include towers, site hardware, enclosures, cable, connectors, jumpers, base station antennas, power systems, grounding, base station radios, bi-directional amplifiers, wireless broadband radios, wireless networking gear, wireless local area network (WLAN) products, and security and surveillance products. Our network infrastructure service offering includes connector installation, custom jumper assembly, filter product tuning, site kitting, logistics integration, application engineering network design and wireless network training. Mobile devices and accessory products include cellular phone and data device accessories such as replacement batteries, cases, hands-free kits, mobile amplifiers, power supplies, bluetooth and corded headsets, mounts, car antennas, music accessories and data and memory cards as well as two-way radios and related accessories. Retail merchandising displays, promotional programs, customized order fulfillment services and affinity-marketing programs, including providing private label Internet sites, complement our mobile devices and accessory product offering. Installation, test and maintenance products are used to install, tune, maintain and repair wireless communications equipment. Products include sophisticated analysis equipment and various frequency-, voltage- and power-measuring devices, as well as an assortment of tools, hardware, GPS, safety and replacement and component parts and supplies required by service technicians.  For more detailed financial information regarding our business segments for each of the past three fiscal years, see Note 10 to the Consolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K for the fiscal year ended March 27, 2011.

While we principally provide manufacturer brand-name products, a variety of products are developed and offered under TESSCO owned-brands including, Wireless SolutionsÒ, VentevÒ, TerraWave® and Airstream. The products we offer under the TESSCO-owned brands generally consist of device accessory products that fall into the mobile device and accessory segment as well as WLAN and network infrastructure accessory products and remote monitoring and control solutions that fall into the network infrastructure segment. Also, our WLAN certification training is offered under our GigaWave® trade name and is reported in the network infrastructure segment. We have not incurred significant research and development expenditures in any of the last three fiscal years.

Our products are sold as part of our integrated product and supply chain solutions. Our supply chain services for all product areas are grouped under Knowledge, Configuration, Delivery and Control. Knowledge solutions include the entire suite of TESSCO publications that focus on educating the industry, including product highlights, showcases and/or comparisons, with comprehensive specifications on the products, solutions and applications that are offered and reinforced by engineering, sales and technical support, as well as hands-on training programs. Configuration services are comprised of customized product solution kitting and assembly, logistics management and consumer and retail merchandising and marketing, allowing the products to be delivered ready for immediate use, installation or resale. Our delivery system allows the customer to select 1-, 3- or 5-day “just-in-time” delivery, to specific delivery locations, designed to eliminate the customer’s need for staging and warehousing. Our services that increase customer control include predetermined monthly pricing levels, the ability to monitor multi-site purchasing with pre-approved, customized parameters indicating who is able to order how much of which specific products, order delivery tracking, product usage tracking, history reporting and alternative financing options.

As part of our commitment to customer service, we typically allow most customers to return most products for any reason, for credit, within 30 days of the date of purchase. Total returns and credits have been less than 3% of revenues in each of the past three fiscal years.

As of March 27, 2011, we offered products purchased from approximately 380 manufacturers. A substantial portion of our inventory purchases is concentrated with a small number of vendors. In fiscal year 2011, sales of products purchased from our largest vendor, Otter Products, generated approximately 13% of our revenue, the majority of which was sold to our largest customer AT&T Mobility. Sales of products from our next nine top vendors accounted for approximately 27% of our fiscal year 2011 revenues, thus resulting in revenue from sales of products purchased from our top ten vendors of approximately 40% of our total revenues. Although we do not maintain long-term supply contracts with our vendors, we believe that alternative sources of supply are available for many of the product types we carry. The agreements and arrangements on which most of our larger vendor and customer relationships are based are of limited duration and terminable by either party upon several months or otherwise short notice.

 
We previously supplied repair and replacement materials to authorized service centers for Nokia primarily in the United States and Canada. Nokia terminated our repair and replacement parts arrangement effective September 30, 2010. Accordingly, revenues and gross profits from this relationship have ceased. During fiscal year 2011, sales from the Nokia relationship represented less than 1% of total consolidated revenues.

We are dedicated to superior performance and quality and consistency of service in an effort to maintain and expand vendor relationships but there can be no assurance that we will continue to be successful in this regard in the future, or that competitive pressures or other events beyond our control will not have a negative impact on our ability to maintain these relationships or to continue to derive revenues from these relationships.

Customers

Our customer base consists of commercial customers and consumers, which accounted for approximately 98% and 2%, respectively, of fiscal year 2011 revenues. Commercial customers share the characteristic that they are organizations that design, install, operate, repair or sell some type of wireless communications system and/or products. We group our commercial customers into three different categories: 1) public carriers and network operators, 2) resellers and 3) self-maintained users (SMUs) and governments, which accounted for approximately 15%, 67% and 18%, respectively, of fiscal year 2011 commercial revenues.

Public carriers and network operators are system operators that are generally responsible for building and maintaining the public infrastructure system and providing airtime service to individual subscribers. Resellers include dealers and resellers that sell, install and/or service cellular telephone, wireless networking, broadband and two-way radio communications equipment for the enterprise and consumer markets. These resellers include local and national value-added resellers and retailers. SMUs and government customers include commercial entities, major utilities, transportation companies, installation centers, federal agencies and state and local governments.

Consumers place orders for devices and related accessories via telephone and the Internet primarily through our affinity-marketing programs. Under these programs, we collaborate with our affinity-marketing clients to sell to their customers under their brands. In many cases, we act as the merchant on behalf of the affinity-marketing client, accepting the order, shipping from our inventory and collecting payment. In addition to our affinity programs, we maintain our own internally developed consumer Web site, YourWirelessSource.comTM, which offers cellular phone accessories and other complementary consumer wireless products.

Our largest customer relationship, AT&T Mobility, a top tier cellular carrier purchasing phone accessories, accounted for approximately 26% of our revenues during fiscal year 2011. Our next nine largest customer relationships accounted for 11% of our total revenues during fiscal year 2011, and therefore, our top ten customer relationships totaled 37% of our total revenues.

Although we currently sell to customers in over 100 countries, approximately 97% of our sales have been made to customers in the United States during each of the past three fiscal years. Due to our diverse product segments and our wide customer base, our business is not significantly affected by seasonality in the aggregate. However, sales to our retailers generally peak in our second and third quarters in preparation for the winter holiday season. Also, our network infrastructure sales are typically affected by weather conditions in the United States, especially in our fourth quarter.

 
Method of Operation

We believe that we have developed a highly integrated, technologically advanced and efficient method of operation based on the following key tenets:
 
 
·
Understanding and anticipating customers' needs and building solutions by cultivating lasting relationships;
 
·
Allowing customers to make the best decisions by delivering product knowledge, not just information, through our knowledge tools, including The Wireless Journal®, and TESSCO.com®, our Internet-based Solution and Transaction System;
 
·
Responding to what we refer to as "the moments of truth" by providing customers with sales, service and technical support, 24 hours a day, 7 days a week, 365 days a year;
 
·
Providing customers what they need, when and where they need it by delivering integrated product and supply chain solutions; and
 
·
Helping customers enhance their operations by providing real-time order tracking and performance measurement.

We operate as a team of teams structured to enhance marketing innovation, customer focus and operational excellence and consist of these integrated units:

Market Development and Sales: In order to meet the needs of a dynamic and diverse marketplace, sales and marketing activities are organized on an end-market basis. Sales teams are focused on: public carrier and network operator (e.g., carriers, tower owners, program site managers, wireless Internet service providers, contractors and integrators); SMUs and governments (e.g., self-maintained users, governments, manufacturers, repair centers); resellers (e.g. retailers, dealers and value-added resellers); and consumers (e.g., affinity programs, Web store programs and fulfillment and consumer services). This organization allows for the development of unique product and solution offerings to meet the needs of our diverse customer base.

We attempt to understand and anticipate customers' needs and to build solutions by cultivating lasting relationships. Our commercial customer database contains detailed information on approximately 280,000 existing and potential customers, including the names of key personnel, past contacts, inquiries, and buying and credit histories. This extensive customer database enables us to identify and target potential customers and to market specific products to these targeted customers. Potential customers are identified through their responses to TESSCO.com®, direct-marketing materials, advertisements in trade journals and industry trade shows, as well as through referrals from other TESSCO customers and vendors. Customer relationship representatives pursue these customer inquiries through distribution of our Knowledge Tools and through phone contact, electronic communications and field visits. The information technology system tracks potential customer identification from the initial marketing effort through the establishment and development of a purchasing relationship. Once a customer relationship is established, we carefully analyze purchasing patterns and identify opportunities to encourage customers to make more frequent purchases of a broader array of products. Scheduled contacts are made to each regularly purchasing customer for the purpose of information dissemination, order generation, database maintenance and the overall enhancement of the business relationship. The process is aimed at attracting prospects to TESSCO, converting these prospects to buying customers, and ultimately migrating them to loyal, total-source monthly buyers.

Solutions Development, Product Management and Marketing: We actively monitor advances in technologies and industry trends, both through market research and continual customer and manufacturer interaction, and continue to enhance our product offering as new wireless communications products and technologies are developed. To complement our broad product portfolio, we provide technical expertise and consultation to assist our customers in understanding technology and choosing the right products for their specific application. Our Solutions Services teams offer applications engineering to market specific applications such as positive train control, smart grid and fiber networks, custom integrated solutions for power systems and site kitting and flexible custom network design services for areas such as in-building coverage, tower design and wireless video surveillance systems.


In addition to determining the product offering, our product and solutions development teams provide the technical foundation for both customers and our personnel. The Wireless Product Knowledge System (WPKS) is continually updated to add new products and additional technical information in response to manufacturer specification changes and customer inquiries. WPKS contains detailed information on each stock keeping unit (SKU) offered, including full product descriptions, category classifications, technical specifications, illustrations, product cost, pricing and delivery information, alternative and associated products, and purchase and sales histories. This information is available on a real-time basis to all of our personnel for product development, procurement, technical support, cataloging and marketing.

As a thought leader in the wireless industry, TESSCO’s marketing materials are used for both educating the industry and for promoting TESSCO’s value. We utilize our WPKS to develop both broad-based and customized product solution information materials. These materials are designed to encourage both existing and potential customers to realize the value we provide in their product solution and supply chain decisions. These Knowledge Tools are an integrated suite of informational print and electronic media. They include: The Wireless Guide®, our product catalogue which is available electronically on TESSCO.com and has periodically been sent to customers in hard copy form in the past; The Wireless Journal®, a trade journal with a bi-monthly circulation of approximately 80,000, which is designed to introduce the reader to our capabilities and product offerings, and contains information on significant industry trends and product reviews; The Wireless Update®, which is emailed monthly to more than 120,000 different individuals and is uniquely produced for various portions of our customer base; The Wireless Bulletin® family, including The Wireless Bulletin for Accessories for Handsets & Music Devices, The Wireless Bulletin for Installation, Test & Maintenance Products, The Wireless Bulletin for Security & Surveillance, The Wireless Bulletin for Site Planning, The Wireless Bulletin for Training, and The Wireless Bulletin for Wireless Networking Solutions, which are distributed throughout the year and have an annual circulation of approximately 200,000; Technical Application Notes, Application Drawings and White Papers, which provide in-depth planning and installation instructions and diagrams; Tech Tips, which offer suggestions and ideas from TESSCO customers; and TESSCO.com®. In addition, TESSCO publishes online, Web-browser-enabled, companion versions of its many printed publications, including The Wireless Bulletin Online, The Wireless Guide Online and The Wireless Journal Online.

TESSCO.com® is our e-commerce site. It offers online access to a real-time system of Knowledge, Configuration, Delivery and Control of product and supply chain solutions. Intended for our commercial customers who design, build, run, maintain and use wireless systems, its feature-rich capabilities include:

 
·
Electronic versions of various Knowledge Tools, including: several customized versions of The Wireless Bulletin® and The Wireless Update®, as well as The Wireless Guide® and The Wireless Journal®;
 
·
13 product search options, ranging from keyword searches to product category browsing;
 
·
Real-time pricing and product availability;
 
·
Easy ordering capabilities, including a worksheet ordering tool which allows for the construction and configuration of a total-source order; additionally, worksheets can be saved with or without protection, as well as copied, shared, uploaded and emailed;
 
·
RSS Feeds that allow customers to see TESSCO’s newest products;
 
·
Order confirmation – specifying the contents, order status, delivery date, tracking number and total cost of an order;
 
·
Order reservations, order status, back-order details and four-month order history;
 
·
The ability to view invoices online and customer-specific pricing, based on our tiered pricing levels tied to a customer's aggregate purchase volume;
 
·
Comprehensive, targeted marketing pages for more than 250 product solutions;
 
·
Interactive, how-to illustrations for a range of wireless applications;
 
·
Library of videos and other valuable content;
 
·
Variety of useful customer service, financial and technical support pages; and
 
·
Feedback Center that makes it easy for customers to provide input on our services, Knowledge Tools and website.

Our Knowledge Tools empower our customers to make better decisions by delivering product knowledge, rather than just information. These tools also afford our manufacturers the opportunity to develop their brands and promote their products to a broad and diverse customer base.

Procurement and Inventory Management: Our product management and purchasing system aims to provide customers with a total source of broad and deep product availability, while maximizing the return on our inventory investment.

We use our information technology system to monitor and manage our inventory. Historical sales results, sales projections and information regarding vendor lead times are all used to determine appropriate inventory levels. The information technology system also provides early warning reports regarding upcoming inventory requirements. As of March 27, 2011 and March 28, 2010, we had an immaterial level of backlog orders. Most backlog orders as of March 27, 2011, are expected to be filled within 90 days of fiscal year-end. For the fiscal years ended March 27, 2011 and March 28, 2010, inventory write-offs, excluding purchases from vendors for whom we hold goods on consignment, were 0.9% and 0.6% of total purchases, respectively. In many cases, we have been able to return slow-moving inventory to our vendors pursuant to stock rotation agreements. Inventory turns for fiscal years 2011 and 2010 were 10.4 and 9.8, respectively. This increase is largely due to overall 16% increase in sales in fiscal year 2011, as compared to fiscal year 2010 while maintaining approximately the same inventory levels.

Customer Support and Order Entry: Our customer support teams are responsible for responding to what we refer to as "the moments of truth" by delivering sales and customer support services through an effective and efficient transaction system. We also continually monitor our customer service performance through report cards sent for each product delivery, customer surveys and regular interaction with customers. By combining our broad product offering with a commitment to superior customer service, we seek to reduce a customer's overall procurement costs by enabling the customer to consolidate the number of suppliers from which it obtains products, while also reducing the customer's need to maintain high inventory levels.

Our information technology system provides detailed information on every customer account, including recent inquiries, buying and credit histories, separate buying locations within a customer account and contact diaries for key personnel, as well as detailed product information, including technical, product availability and pricing information. The information technology system increases sales productivity by enabling any customer support representative to provide any customer with personalized service and also allows non-technical personnel to provide a high level of technical product information and order assistance.

We believe that our commitment to providing prompt, friendly and efficient customer service before, during and after the sale enables us to maximize sales, customer satisfaction and customer retention. The average number of commercial customers increased from 12,400 in fiscal year 2010 to 12,700 in fiscal year 2011. An average of 700 consumer end-users were served per month in fiscal year 2011 as compared with 800 in fiscal year 2010. This decline in consumers is due to changes in relationships with some of our affinity partners.

Fulfillment and Distribution: Orders are received at our Hunt Valley, Maryland, Reno, Nevada and San Antonio, Texas customer sales support centers. As orders are received, customer representatives have access to technical information, alternative and complementary product selections, product availability and pricing information, as well as customer purchasing and credit histories and recent inquiry summaries. An automated warehouse management system, which is integrated with the product planning and procurement system, allows us to ensure inventory control, to minimize multiple product shipments to complete an order and to limit inventory duplication. Bar-coded labels are applied to every product, allowing distribution center personnel to utilize radio frequency scanners to locate products, fill orders and update inventory records in real-time, thus reducing overhead associated with the distribution functions. We contract with a variety of freight line and parcel transportation carrier partners to deliver orders to customers.

 

Performance and Delivery Guarantee (PDG) charges are generally calculated on the basis of the weight of the products ordered and on the delivery service requested, rather than on distance to the customer. We believe that this approach emphasizes on-time delivery instead of shipment dates, enabling customers to minimize their inventories and reduce their overall procurement costs while guarantying date specific delivery, thereby encouraging them to make us their total source supplier.

Information Technology: Our information technology system is critical to the success of our operations. We have made substantial investments in the development of this system, which integrates cataloging, marketing, sales, fulfillment, inventory control and purchasing, financial control and internal and external communications. The information technology system includes highly developed customer and product databases and is integrated with our Configuration, Fulfillment and Delivery system. The information contained in the system is available on a real-time basis to all of our employees as needed and is utilized in every area of our operations.
 
We develop, construct, maintain and host several web sites for certain affinity partners. These sites include control capabilities, including partner branding, independent landing pages and URLs, product filtering and purchase authorization limits that allow us to seamlessly interact with the customer, fulfill online orders and provide required information to these affinity partners.

We believe that we have been successful to date in pursuing a highly integrated, technologically advanced and efficient method of operations; however, disruption to our day-to-day operations, including failure of our information technology system, distribution system, or freight carrier interruption, could impair our ability to receive and process orders or to ship products in a timely and cost-efficient manner.

Acquisitions

In July 2007, we acquired the net assets and business of NetForce Solutions, Inc. (NetForce), a provider of technical and sales training solutions to wireless, telecommunications, and networking industries. The purchase included substantially all of the non-cash business assets of NetForce for a cash payment of approximately $659,500.

In April 2006, we acquired the non-cash assets and businesses of TerraWave Solutions, Ltd. (TerraWave) and its commonly owned affiliate, GigaWave Technologies, Ltd. (GigaWave) for an initial cash payment of approximately $3.9 million, and potential additional cash earn-out payment obligations accruing over the four-year period ending in April 2010, contingent on the achievement by the TerraWave/GigaWave business unit post-acquisition of certain minimum earnings thresholds. The total purchase price, including earn-out payments, was approximately $13.1 million.

The TerraWave business designs, configures and offers Wi-Fi products and accessories, most of which are branded under TerraWave's private label. Some of the TerraWave-branded products are sold with products of Cisco Systems under Cisco's Strategic Technology Integrator program. The GigaWave business provides curriculum development and hands-on, instructor-led training courses for the Wireless Local Area Network (WLAN) industry. GigaWave develops and delivers wireless networking courseware for Cisco Systems, allowing IT professionals to obtain Cisco Wireless Certifications.

Competition

The wireless communications distribution industry is competitive and fragmented, and is comprised of distributors, such as Hutton Communications, Brightpoint, KGP Logistics, Westcon, Comstor, Tech Data, Ingram Micro, Superior Communications, Site Pro 1, Wincomm, Talley Communications and Alliance Corporation. In addition, many manufacturers sell and fulfill directly to customers. Barriers to entry for distributors are relatively low, particularly in the mobile devices and accessory market, and the risk of new competitors entering the market is high. In addition, the



agreements or arrangements with our customers or vendors looking to us for product and supply chain solutions are typically of limited duration and are terminable by either party upon several months or otherwise short notice. Accordingly, our ability to maintain these relationships is subject to competitive pressures and challenges. Some of our current competitors have substantially greater capital resources and sales and distribution capabilities than we do. In response to competitive pressures from any of our current or future competitors, we may be required to lower selling prices in order to maintain or increase market share, and such measures could adversely affect our operating results. We believe, however, that our strength in service, the breadth and depth of our product offering, our information technology system, and our large customer base and purchasing relationships with approximately 380 manufacturers, provide us with a significant competitive advantage over new entrants to the market.

Continuing changes in the wireless communications industry, including risks associated with conflicting technology, changes in technology, inventory obsolescence, and consolidation among wireless carriers, could adversely affect future operating results.

We believe that the principal competitive factors in supplying products to the wireless communications industry are the quality and consistency of customer service, particularly timely delivery of complete orders, breadth and quality of products offered and total procurement costs to the customer. We believe that we compete favorably with respect to each of these factors. In particular, we believe we differentiate ourselves from our competitors based on the breadth of our product offering, our ability to quickly provide products and supply chain solutions in response to customer demand and technological advances, our knowledge and expertise in wireless technologies and the wireless marketplace, the level of our customer service and the reliability of our order fulfillment process.

Intellectual Property

We seek to protect our intellectual property through a combination of trademarks, service marks, confidentiality agreements, trade secret protection and, if and when appropriate, patent protection. Thus far, we have generally sought to protect our intellectual property, including our product data and information, customer information and information technology systems, through trademark filings and nondisclosure, confidentiality and trade secret agreements. We typically require our employees, consultants, and others having access to our technology, to sign confidentiality and nondisclosure agreements. There can be no assurance that these confidentiality and nondisclosure agreements will be honored, or whether they can be fully enforced, or that other entities may not independently develop systems, technologies or information similar to that on which we rely.

TESSCO Communications Incorporated, a wholly-owned subsidiary of TESSCO Technologies Incorporated, maintains a number of registered trademarks and service marks in connection with our business activities, including: A Simple Way of Doing Business Better®, Delivering Everything for Wireless®, Delivering What You Need…When and Where You Need It®, GigaWave Technologies®, Going Beyond the Ordinary®, LinkUPS®, ORDERflow®, Solutions That Make Wireless Work®, TerraWave Solutions®, TESSCO®, TESSCO Technologies®, TESSCO.com®, Ventev®, Ventev Innovations®, The Vital Link to a Wireless World®, The Wireless Bulletin®, The Wireless Guide®, The Wireless Journal®, Wireless Solutions®, The Wireless Update®, Your Total Source®, and Your Virtual Inventory®, among others. Our general policy is to file for trademark and service mark protection for each of our trademarks and trade names and to enforce our rights against any infringement.

Although we currently hold no patents, we intend, if and when appropriate, to seek patent protection for patentable technology. The ability to obtain patent protection involves complex legal and factual questions. Others may obtain patent protection for technologies that are important to our business, and as a result, our business may be adversely affected. In response to patents of others, we may need to license the right to use technology patented by others, or in the event that a license cannot be obtained, to design our systems around the patents of others.

 
Environmental Regulation
 
We are subject to various laws and governmental regulations concerning environmental matters and employee safety and health in the United States. We are also subject to regulation by the Occupational Safety and Health Administration concerning employee safety and health matters. Compliance with these federal, state and local laws and regulations related to protection of the environment and employee safety and health has had no material effect on our business. There were no material capital expenditures for environmental projects in fiscal year 2011 and there are no material expenditures planned for such purposes in fiscal year 2012.

Employees

As of March 27, 2011, we had 874 full-time equivalent employees. Of our full-time equivalent employees, 409 were engaged in customer and vendor service, marketing, sales and product management, 373 were engaged in fulfillment and distribution operations and 92 were engaged in administration and technology systems services. No employees are covered by collective bargaining agreements. We consider our employee relations to be excellent.
 
Executive Officers

Executive officers are appointed annually by the Board of Directors and, subject to the terms of any applicable employment agreement, serve at the discretion of the Board of Directors. Information regarding our executive officers is as follows:

Name
Age
Position
   
         
Robert B. Barnhill, Jr.
 67
Chairman, President and Chief Executive Officer
 
Robert B. Barnhill, Jr. has served as president and chief executive officer since founding the current business in 1982. Mr. Barnhill has been a director of the Company since 1982, and has served, and continues to serve, as Chairman of the Board since November 1993.
 
David M. Young                                  
 
40
 
Senior Vice President, Chief Financial Officer and Corporate Secretary
 
 
David M. Young joined the Company in July 1999 and has served as senior vice president and chief financial officer since March 2006. Between April 2002 and February 2006, Mr. Young served as a vice president, and between February 2005 and March 2006, he served as acting chief financial officer. Prior to February 2005, Mr. Young served as the Company’s controller. Since March 2004, Mr. Young has served, and continues to serve, as Corporate Secretary. Prior to joining the Company, Mr. Young served as assistant vice president and assistant corporate controller at Integrated Health Services, Inc.
 
Gerald T. Garland
 
60
 
Senior Vice President of Solutions Development and Product Management
 
 
Gerald T. Garland rejoined the Company in April 2003 and has served as senior vice president of solutions development and product management since April 2006. Mr. Garland has served as senior vice president of the installation, test and maintenance line of business since May 2005, as senior vice president of the mobile devices and accessories line of business since April 2004 and as senior vice president of the network infrastructure line of business since April 2003. Between September 1999 and April 2003, Mr. Garland served as director of business development with American Express Business Services and chief financial officer of Mentor Technologies, Inc. Mr. Garland served as the Company’s chief financial officer from September 1993 to September 1999.
 
Douglas A. Rein
 
 51
 
Senior Vice President of Performance Systems and Operations
   
Douglas A. Rein joined the Company in July 1999 as senior vice president of performance systems and operations. Previously, he was director of operations for Compaq Computer Corporation and vice president, distribution and logistics operations for Intelligent Electronics.
 
Said Tofighi
 
 56
 
Senior Vice President of Market Development and Sales
   
Said Tofighi rejoined the Company in October 2000 as vice president of customer administration. In April 2005, Mr. Tofighi began serving as vice president of the customer supply chain unit and served in that capacity until May 2006, when he was appointed senior vice president, customer supply chain. In April 2007, Mr. Tofighi began serving as senior vice president of market development and sales. Mr. Tofighi originally joined the Company in March 1993 and served in various leadership roles through July 1999. From July 1999 through October 2000, Mr. Tofighi worked outside the Company.




We are not able to identify or control all circumstances that could occur in the future that may adversely affect our business and operating results. The following are certain risk factors that could adversely affect our business, financial position and results of operations. These risk factors and others described in this Annual Report on Form 10-K should be considered in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause the actual results and conditions to differ materially from those projected in the forward-looking statements. Additional risks and uncertainties that management is not aware of or focused on, or that management currently deems immaterial may also adversely affect our business, financial position and results of operations. If our business, financial position and results of operations are adversely affected by any of these or other adverse events, our stock price would also likely be adversely affected.

RISKS RELATING TO OUR BUSINESS

We face significant competition in the wireless communications distribution industry.

The wireless communications distribution industry is competitive and fragmented, and is comprised of several national distributors, as well as numerous regional distributors. In addition, many manufacturers sell and fulfill directly to customers. Barriers to entry for distributors are relatively low, particularly in the mobile devices and accessory market, and the risk of new competitors entering the market is high. Some of our current competitors have substantially greater capital resources and sales and distribution capabilities than we do. In response to competitive pressures from any of our current or future competitors, we may be required to lower selling prices in order to maintain or increase market share, and such measures could adversely affect our operating results.
 
We typically purchase and sell our products and services on the basis of individual sales or purchase orders, and even in those cases where we have standing agreements or arrangements with our customers and vendors, those agreements and arrangements typically contain no purchase or sale obligations and are otherwise terminable by either party upon several months or otherwise short notice.

Our sales to customers and our purchases from vendors are largely governed by individual sales or purchase orders, so there is no guarantee of future business. In some cases, we have formal agreements or arrangements with significant customers or vendors, but they are largely administrative in nature and are terminable by either party upon several months or otherwise short notice, and they typically contain no purchase or sale obligations. If our vendors or suppliers refuse to, or for any reason are unable to supply products to us, and if we are not able to procure those products from alternative sources, we may not be able to maintain appropriate inventory levels to meet customer demand and our financial position and results of operations would be adversely affected. Similarly, if customers decide to make purchases from other sources, experience significant changes in demand internally or from their own customer bases, become financially unstable, or are acquired by another company, our ability to generate revenues from these customers may be significantly affected, resulting in an adverse affect on our financial position and results of operations.

The loss or any change in the business habits of key customers or vendors, including AT&T Mobility, may have a material adverse affect on our financial position and results of operations.

Because our standing arrangements and agreements with our customers and vendors typically contain no purchase or sale obligations and are terminable by either party upon several months or otherwise relatively short notice, we are subject to significant risks associated with the loss or change at any time in the business habits and financial condition of key customers or vendors. In fiscal year 2011, sales to our largest customer relationship, AT&T Mobility, a top tier cellular carrier purchasing phone accessories, accounted for approximately 26% of total revenues.

 
During the second half of fiscal year 2011, we experienced lower purchasing volumes and significant pricing pressure from AT&T Mobility. We expect this pricing pressure to continue. In addition, based on recent communications from AT&T Mobility, we also face planned business model changes from them. As a result of the lower volumes and pricing pressure, gross margins declined in the second half of fiscal year 2011, impacting our net profits. These factors will continue to put pressure on our net profits, and AT&T Mobility’s planned business model changes put our current and future business with this customer at risk. As previously stated, the nature of our business is that our relationships with most customers and suppliers, including AT&T Mobility, typically contain no ongoing purchase or sale obligations and are terminable by either party upon relatively short notice.

Our relationship with AT&T Mobility, or sales pursuant to this relationship, could terminate at any time with little or no notice. As a result, if this relationship were to terminate, and unless and until replaced from other sources, our revenue and earnings would substantially decrease and our stock price would likely decline. We have experienced the loss and changes in the business habits of significant customer and vendor relationships in the past and expect to do so in the future. It is the nature of the business. Over the past decade, however, we have generally been successful in replacing significant customer and vendor relationships when lost, and notwithstanding these losses, our revenues over this period have generally increased. There can be no assurance, however, that we will be successful in replacing any of our current relationships if and when lost, or in the event of a substantial reduction in revenues from any such relationship, including our relationship with AT&T Mobility. Unless and until replaced, any such loss will likely have a material adverse affect on our business, results of operations and financial condition, and our stock price will likely be adversely affected.

Our business depends on the continued tendency of wireless equipment manufacturers and network operators to outsource aspects of their business to us in the future.

We provide functions such as distribution, inventory management, fulfillment, customized packaging, e-commerce solutions, and other outsourced services for many wireless manufacturers and network operators. Certain wireless equipment manufacturers and network operators have elected, and others may elect, to undertake these services internally. Additionally, our customer service levels, industry consolidation, competition, deregulation, technological changes or other developments could reduce the degree to which members of the global wireless industry rely on outsourced logistic services such as the services we provide. Any significant change in the market for our outsourced services could have a material adverse effect on our business. Our outsourced services are generally provided under short-term contractual arrangements. The failure to obtain renewals or otherwise maintain these agreements on terms, including price, consistent with our current terms could have a material adverse effect on our business.

We require substantial capital to operate, and the inability to obtain financing on favorable terms will adversely impact our business, financial position and results of operations.

Our business requires substantial capital to operate and to finance accounts receivable and product inventory that are not financed by trade creditors. We have historically relied upon cash generated from operations, revolving credit facilities and trade credit from our vendors to satisfy our capital needs and finance growth. As the financial markets change and new regulations come into effect, the cost of acquiring financing and the methods of financing may change. Changes in our credit rating or other market factors may increase our interest expense or other costs of capital, or capital may not be available to us on competitive terms to fund our working capital needs. Our credit facilities and long-term debt arrangements are of specified terms and contain various financial and other covenants that may limit our ability to borrow or limit our flexibility in responding to business conditions. While we generally expect to either extend or replace our credit facilities at term expirations, there can be no assurances that we will be able to do so on favorable terms, or at all. The inability to maintain or when necessary obtain adequate sources of financing could have an adverse affect on our business. Our current revolving credit facility expires in May 2012. Some of our existing financing instruments involve variable rate debt, thus exposing us to risk of fluctuations in interest rates. Such fluctuations in interest rates could have an adverse affect on our business, financial position and results of operations. We have and may also in the future use interest rate swaps in an effort to achieve a desired proportion of fixed and variable rate debt. We utilize these derivative financial instruments to enhance our ability to manage risk, including interest rate exposures that exist as part of our ongoing business operations. However, our use of these instruments may not effectively limit or eliminate our exposure to a decline in operating results due to changes in interest rates.

 
Our ability to borrow funds under our credit agreement could be constrained by the level of eligible receivables and inventory.

Our borrowing availability under our existing revolving credit facility is limited to certain amounts of eligible accounts receivable and inventory.   If the value of eligible accounts receivable and inventory were to decrease significantly, the amount available for borrowing under the facility could decrease.

The ongoing weakness in the global economic environment may have significant effects on our customers and suppliers that could result in material adverse effects on our business, operating results, and stock price.

Notwithstanding the increased potential for economic recovery, the ongoing weakness in the global economic environment – which has included, among other things, significant reductions in available capital and liquidity from banks and other providers of credit, substantial reductions and/or fluctuations in equity and currency values worldwide, significant decreases in consumer confidence and consumer and business spending, high rates of unemployment and concerns that the worldwide economy may continue to experience significant challenges – may materially adversely affect our customers’ access to capital or willingness to spend capital on our products, and/or their levels of cash liquidity with which to pay for our products. In addition, our suppliers’ access to capital and liquidity may continue to be affected, which may in turn adversely impact their ability to maintain inventories, production levels, and/or product quality, or cause them to raise prices or lower production levels, or result in their ceasing operation.

The potential effects of the weakness in the global economic environment are difficult to forecast and mitigate. As a consequence, our operating results for a particular period may be more difficult to predict. Any of the foregoing effects could have a material adverse effect on our results of operations and financial condition, and could adversely affect our stock price.

We may be unable to successfully execute our merchandising and marketing strategic initiatives.

We are focusing our sales and marketing efforts and initiatives to maximize sales. If we fail to successfully execute these initiatives, our business, financial position and results of operations could be adversely affected.

The telecommunications products marketplace is dynamic and challenging because of the continued introduction of new products and services.

We must constantly introduce new products, services and product features to meet competitive pressures. We may be unable to timely change our existing merchandise sales mix in order to meet these competitive pressures, which may result in increased inventory costs, inventory write-offs or loss of market share.

Additionally, our inventory may also lose value due to price changes made by our significant vendors, in cases where our arrangements with these vendors do not provide for inventory price protection, or in cases that the vendor is unable or unwilling to provide these protections.

Consolidation among wireless service carriers could result in the loss of significant customers.

The wireless service carrier industry has experienced significant consolidation in recent years. If any of our significant customers or partners are acquired or consolidate with other carriers, or are otherwise involved in any significant transaction that results in them ceasing to do business with us, or significantly reducing the level of business that they do with us, our revenues from those customers could be significantly affected, possibly resulting in an adverse affect on our financial position and results of operations.

 
The failure of our information systems or inability to upgrade them could have a material adverse affect on our business, financial position and results of operations.

We are highly dependent upon our internal computer and telecommunication systems to operate our business. There can be no assurance that our information systems will not fail or experience disruptions, that we will be able to attract and retain qualified personnel necessary for the operation of such systems, that we will be able to expand and improve our information systems, that we will be able to convert to new systems efficiently as necessary, or that we will be able to integrate new programs effectively with our existing programs. Any of such problems, or any significant damage or destruction of these systems, could have an adverse affect on our business, financial position and results of operations.

We depend heavily on e-commerce, and website security breaches or Internet disruptions could have a material adverse affect on our business, financial position and results of operations.

We rely on the Internet (including TESSCO.com® and other affinity websites) for a significant percentage of our orders and information exchanges with our customers. The Internet and individual websites have experienced a number of disruptions and slowdowns, some of which were caused by organized attacks. In addition, some websites have experienced security breakdowns. There can be no assurances that our website will not experience any material breakdowns, disruptions or breaches in security. If we were to experience a security breakdown, disruption or breach that compromised sensitive information, this could harm our relationship with our customers or suppliers. Disruption of our website or the Internet in general could impair our order processing or more generally prevent our customers and suppliers from accessing information or placing orders. This could have an adverse affect on our business, financial position and results of operations.

The inability to hire or retain certain key professionals, management and staff could adversely affect our business, financial condition and results of operations.

The nature of our business includes (but is not limited to) a high volume of transactions, business complexity, wide geographical coverage, and broad scope of products, suppliers, and customers. In order to compete, we must attract, retain and motivate executives and other key employees, including those in managerial, technical, sales, marketing and support positions. Hiring and retaining qualified executives, information technology and business generation personnel are critical to our business. While our success depends upon the skills of many of our personnel, we are particularly dependent upon the skills and leadership of Robert B. Barnhill, Jr., our chairman, president and chief executive officer. The loss of any of these individuals, and particularly Mr. Barnhill, could have a material adverse affect on our business, financial position and results of operations.

To attract, retain and motivate qualified employees, we rely heavily on stock-based incentive awards such as Performance Stock Units (PSUs). If performance targets associated with these PSUs are not met, or the value of such stock awards does not appreciate as measured by the performance of the price of our common stock and/or if our other stock-based compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain and motivate our employees could be adversely impacted, which could negatively affect our business, financial position and results of operations and/or require us to increase the amount we spend on cash and other forms of compensation. Our ability to issue PSUs is also limited by the provisions of and our available shares under our current and/or future stock incentive plans, which may be subject to shareholder approval. At present, there are 4,303 shares available for future awards under our incentive plan and we have no immediate plan to get shareholder approval for an increase in such number.  This may have an adverse effect on our continued ability to attract and retain, and motivate, our employees.

The damage or destruction of any of our principal distribution or administrative facilities could materially adversely impact our business, financial position and results of operations.

If any of our distribution centers in Hunt Valley, Maryland or Reno, Nevada, were to be significantly damaged or destroyed, we could suffer a loss of product inventory and our ability to conduct our business in the ordinary course could be materially and adversely affected. Similarly, if our office locations in Maryland, Nevada or Texas were to be significantly damaged or destroyed, our ability to conduct marketing, sales and other corporate activities in the ordinary course could be adversely affected.

 
We depend on third parties to manufacture products that we distribute and, accordingly, rely on their quality control procedures.

Product manufacturers typically provide limited warranties directly to the end consumer or to us, which we generally pass through to our customers. If a product we distribute for a manufacturer has quality or performance problems, our ability to provide products to our customers could be disrupted, which could adversely affect our operations.

We are subject to potential declines in inventory value.

We are subject to the risk that the value of our inventory will decline as a result of price reductions by vendors or technological obsolescence. It is the policy of many of our vendors to protect distributors from the loss in value of inventory due to technological change or the vendors’ price reductions. Some vendors (including those who manufacture our proprietary products), however, may be unwilling or unable to pay us for price protection claims or products returned to them under purchase agreements. No assurance can be given that such practices to protect distributors will continue, that unforeseen new product developments will not adversely affect us, or that we will be able to successfully manage our existing and future inventories.

Our future operating results depend on our ability to purchase a sufficient amount of finished goods and bulk inventory to meet the demands of our customers.

Our ability to meet customers' demands depends, in part, on our ability to obtain timely and adequate delivery of inventory from our suppliers. We have experienced shortages in the past that have negatively impacted our operations. Although we work closely with our suppliers to avoid these types of shortages, there can be no assurances that we will not encounter these problems in the future. Furthermore, certain of our components are available only from a single source or limited sources. We may not be able to diversify sources in a timely manner. A reduction or interruption in supplies or a significant increase in the price of supplies could have a negative impact on our results of operations or financial condition.

If our business does not perform well, or if we otherwise experience a decline in the fair values of a portion or all of our business, we may be required to recognize impairments of our intangible or other long-lived assets, which could adversely affect our results of operations or financial condition.

Goodwill and indefinite lived intangible assets are initially recorded at fair value and are not amortized, but are reviewed for impairment at least annually or more frequently if impairment indicators are present. In assessing the recoverability of goodwill and indefinite lived intangible assets, we make estimates and assumptions about sales, operating margin, growth rates and discount rates based on our budgets, business plans, economic projections, anticipated future cash flows and marketplace data. There are inherent uncertainties related to these factors and management’s judgment in applying these factors. Goodwill and indefinite lived asset valuations have been calculated using an income approach based on the present value of future cash flows of each reporting unit. We could be required to evaluate the recoverability of goodwill and indefinite lived assets prior to the annual assessment if we experience disruptions to the business, unexpected significant declines in operating results, divestiture of a significant component of our business or sustained market capitalization declines. These types of events and the resulting analyses could result in goodwill and indefinite lived asset impairment charges in the future. Impairment charges could substantially affect our financial results in the periods of such charges. In addition, impairment charges would negatively impact our financial ratios and could limit our ability to obtain financing in the future. As of March 27, 2011, we had $12.5 million of goodwill and indefinite lived intangible assets, which represented approximately 7.8% of total assets. All goodwill and intangible assets have been allocated to the Network Infrastructure segment.

 
Deferred income tax represents the tax effect of the differences between the book and tax bases of assets and liabilities. Deferred tax assets are assessed periodically by management to determine if they are realizable. Factors in management’s determination include the performance of the business, projections of future taxable income, and the feasibility of ongoing tax planning strategies. If based on available information, it is more likely than not that the deferred income tax asset will not be realized then a valuation allowance must be established with a corresponding charge to net income. Such charges could have a material adverse effect on our results of operations or financial condition.

Our future results of operations may be impacted by the prolonged weakness in the current economic environment which may result in an impairment of any goodwill recorded and/or other long lived assets or the recording of a valuation allowance on our deferred tax assets, which could adversely affect our results of operations or financial condition.

We rely on trademark filings and confidentiality agreements to protect our intellectual property rights.

In an effort to protect our intellectual property, including our product data, customer information and information technology systems, through trademark filings and nondisclosure, confidentiality and trade secret agreements, we typically require our employees, consultants and others having access to this information or our technology to execute confidentiality and non-disclosure agreements. These agreements, however, may not provide us with adequate protection against improper use or disclosure of confidential information, and these agreements may be breached. A breach of confidentiality could adversely affect our business. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants and others have previous employment or consulting relationships. Also, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. The disclosure of our proprietary information or trade secrets could impair our competitive position and could have a material adverse affect on our business, financial condition and results of operations. Others may obtain patent protection for technologies that are important to our business, and as a result, our business, financial position and results of operations may be adversely affected. In response to patents of others, we may need to license the rights to use the technology patented by others, or in the event that a license cannot be obtained, design our systems around the patents of others. There can be no assurances as to our ability to obtain any such licenses or to design around the patents of others, and our inability to do so could have an adverse affect on our business, financial position and results of operations.

We offer credit to our customers and, therefore, are subject to significant credit risk.

We sell our products to a large and diverse customer base. We finance a significant portion of such sales through trade credit, typically by providing 30-day payment terms. As a result, our business could be adversely affected in the event of a deterioration of the financial condition of our customers, resulting in the customers’ inability to repay us. This risk may increase if there is a general economic downturn affecting a large number of our customers and in the event our customers do not adequately manage their business or properly disclose their financial condition.

We intend to explore additional growth through acquisitions.

As part of our growth strategy, we may continue to pursue the acquisition of companies that either complement or expand our existing business. As a result, we regularly evaluate potential acquisition opportunities, which may be material in size and scope. In addition to those risks to which our business and the acquired businesses are generally subject to, the acquisition of these businesses gives rise to transactional and transitional risks, and the risk that the anticipated benefits will not be realized.

 
Risks associated with the foreign suppliers from whom our products are sourced could adversely affect our financial performance.
 
The products we sell are sourced from a wide variety of domestic and international suppliers. Global sourcing of many of the products we sell is an important factor in our financial performance. Since the onset of the weakness in the global economic environment in 2008, certain of our suppliers, particularly those in the far east, have experienced financial difficulties and we believe it is possible that a limited number of suppliers may either cease operations or require increased prices in order to fulfill their obligations. Changes in our relationships with suppliers or increases in the costs of purchased raw materials, component parts or finished goods could result in delays, inefficiencies or our inability to market products. In addition, our profit margins would decrease if prices of purchased raw materials, component parts, or finished goods increase and we are unable to pass on those increases to our customers.

We rely on independent shipping companies to deliver inventory to us and to ship products to customers.

We rely on arrangements with independent shipping companies, for the delivery of our products from vendors and to customers. The failure or inability of these shipping companies to deliver products, or the unavailability of their shipping services, even temporarily, could have a material adverse affect on our business. We may also be adversely affected by an increase in freight surcharges due to rising fuel costs and added security. This could adversely impact our selling, general and administrative expenses or lead to price increases to our customers which could decrease customer demand for our products.

Changes in accounting rules could have a material adverse impact on our results of operations.

We prepare our financial statements in conformity with accounting principles generally accepted in the United States. These accounting principles are subject to interpretation by the Financial Accounting Standards Board, the Public Company Accounting Oversight Board, the United States Securities and Exchange Commission (SEC), the American Institute of Certified Public Accountants and various other bodies formed to interpret and create appropriate accounting policies. A change in these policies or a new interpretation of an existing policy could have a significant effect on our reported results and may affect our reporting of transactions.

Changes in income tax and other regulatory legislation

We operate in compliance with applicable laws and regulations and make plans for our structure and operations based upon existing laws and anticipated future changes in the law. When new legislation is enacted with minimal advance notice, or when new interpretations or applications of existing laws are made, we may need to implement changes in our policies or structure. We are susceptible to unanticipated changes in legislation, especially relating to income and other taxes, import/export laws, hazardous materials and other laws related to trade, accounting and business activities. Such changes in legislation may have a significant adverse effect on our business.

We may be subject to litigation.

We may be subject to legal claims or regulatory matters involving stockholder, consumer, antitrust and other issues. Litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages or other adverse affects. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on our business, financial position and results of operations for the period in which the ruling occurred or future periods.
 

 
We may incur product liability claims which could be costly and could harm our reputation.
 
       The sale of our products involves risk of product liability claims against us. We have also been increasing the sales of TESSCO private labeled products and have recently begun to provide an increased level of support services, including product and network designs. We currently maintain product liability insurance, but our product liability insurance coverage is subject to various coverage exclusions and limits and may not be obtainable in the future on terms acceptable to us, or at all. We do not know whether claims against us with respect to our products and services, if any, would be successfully defended or whether our insurance would be sufficient to cover liabilities resulting from such claims. Any claims successfully brought against us could adversely affect our financial condition, and if substantial and relating to our products or industry generally, could affect our business as a whole.

Our expanding offering of private labeled products may have a negative impact on our relationship with our manufacturer partners.

Our product offering includes a growing number of our own proprietary products, which represented approximately 10% of our sales in fiscal 2011. Our proprietary products often compete with other manufacturers' branded items that we offer. A manufacturer may choose to not sell its products to us, or may substantially increase the price of products to us, in response to the competition created by the sale of our proprietary branded products. Either could have a material adverse effect on our business and financial performance.

Claims that our products infringe the proprietary rights of others could harm our business and cause us to incur significant costs.

Our industry has increasingly been subject to patent and other intellectual property rights litigation, particularly from special purpose entities that seek to monetize their intellectual property rights by asserting claims against others. We expect this trend to continue and accelerate and expect that we may be required to defend against this type of litigation, not only asserted against our own intellectual property rights, but also against the intellectual property of products which we have purchased for resale.

RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK

A significant portion of our voting stock is controlled by our executive officers, directors and beneficial owners of 5% or more of our common stock.

Our executive officers, directors and beneficial owners of 5% or more of our common stock and their affiliates, in the aggregate, beneficially owned approximately 52% of our outstanding common stock as of March 27, 2011. Robert B. Barnhill, Jr., our chairman, president and chief executive officer beneficially owned approximately 24% of our outstanding common stock as of March 27, 2011. Should these shareholders decide to act together, they would have the ability to significantly influence all matters requiring shareholder approval, including the election of directors and any significant corporate transaction requiring shareholder approval.

Without approval of our Board of Directors, it may be difficult for a third party to acquire control of the Company. This could affect the price of our common stock.

Certain provisions of our certificate of incorporation and bylaws, certain arrangements to which we are party, and applicable provisions of the Delaware General Corporation Law (DGCL) may each make it more difficult for or may prevent a third party from acquiring control of us or changing our Board of Directors and management. These provisions include advance notice bylaws and limitations on the removal of directors other than for cause, and then only upon the affirmative vote of 75% of our outstanding common stock.  We are also afforded the protections of Section 203 of the DGCL, which will prevent us from engaging in a business combination with a person who acquires at least 15% of our common stock for a period of three years from the date such person acquired such common stock, unless Board of Director or shareholder approval were obtained. Some believe that the provisions described above, as well as any resulting delay or prevention of a change of control transaction or changes in our Board of Directors or management, could deter potential acquirers or prevent the completion of a transaction in which our shareholders could receive a substantial premium over the then current market price for their shares. We, on the other hand, believe that these provisions serve to protect our shareholders against abusive takeover tactics, to preserve and maximize the value of the Company for all shareholders, and to better ensure that each shareholder will be treated fairly in the event of an unsolicited offer to acquire the Company.

 
Following a review by the Board of its corporate governance process and arrangements to ensure that they continue to protect the interests of the Company's shareholders for developing long-term value, the Board of Directors, on January 19, 2011, approved an amendment and restatement of the Company's By-Laws to declassify the Board. As a result, beginning with the 2011 annual meeting of shareholders and at each annual meeting thereafter, successors to the class of directors whose term then expires shall be elected to hold office for a term expiring at the next annual meeting of stockholders, with the effect that at the 2013 annual meeting of shareholders the classification of the Board of Directors shall be eliminated and all directors thereafter will be elected annually. The foregoing summary does not purport to be complete and is qualified in its entirety by reference to the full text of the Company's Fifth Amended and Restated By-Laws which are incorporated herein by reference as Exhibit 3.2.3 to this Annual Report on Form 10-K.

Additionally, on April 25, 2011, the Board approved an amendment and restatement of the Company’s By-Laws to provide that in an uncontested election, if a nominee to the Company’s Board does not receive a majority of the votes cast in his or her election, such nominee shall, within ten business days after the certification of the election results, submit to the Board a letter of resignation for consideration by the Nominating and Governance Committee. The Nominating and Governance Committee shall then assess the appropriateness of the continued service of such nominee and recommend to the Board the action to be taken on such tendered resignation. The Board will determine what action to take within ninety days after the date of the certification of election results. The foregoing summary does not purport to be complete and is qualified in its entirety by reference to the full text of the Company's Sixth Amended and Restated By-Laws which are incorporated herein by reference as Exhibit 3.2.4 to this Annual Report on Form 10-K.

Potential uncertainty resulting from unsolicited acquisition proposals and related matters may adversely affect our business.

In the past we have received, and in the future we may receive, unsolicited proposals to acquire our company or our assets. For example, in September 2010, the Board of Directors received an unsolicited non-binding proposal from Discovery Group for the acquisition of all of our stock not then owned by Discovery Group. At the time, Discovery owned approximately 14% of the Company’s then outstanding common stock. The review and consideration of acquisition proposals and related matters could require the expenditure of significant management time and personnel resources. Such proposals may also create uncertainty for our employees, customers and vendors. Any such uncertainty could make it more difficult for us to retain key employees and hire new talent, and could cause our customers and vendors to not enter into new arrangements with us or to terminate existing arrangements. Additionally, we and members of our board of directors could be subject to future lawsuits related to unsolicited proposals to acquire us. Any such future lawsuits could become time consuming and expensive.
 
Our quarterly operating results are subject to significant fluctuation.

Our operating results have fluctuated from quarter to quarter in the past, and we expect that they will continue to do so in the future. Our earnings may not continue to grow at rates similar to the growth rates achieved in recent years and may fall short of either a prior fiscal period or investors’ expectations. Most of our operating expenses, such as compensation expenses, do not vary directly with the amount of sales and are difficult to adjust in the short term. As a result, if sales in a particular quarter are below expectations for that quarter, we may not proportionately reduce operating expenses for that quarter, and therefore such a sales shortfall would have a disproportionate effect on our net income for the quarter.


Not Applicable.

 

Our corporate headquarters and primary distribution center, known as the Global Logistics Center (GLC), is located in a Company-owned 184,000 square-foot facility north of Baltimore, in Hunt Valley, Maryland. Our sales, marketing and administrative offices are located in leased office space near the GLC. On February 15, 2011, this lease was amended and now expires on December 31, 2017. Monthly rent payments range from $141,900 to $169,400 throughout the lease term. In addition, we lease 66,000 square feet of office and warehouse space adjacent to the GLC in Hunt Valley, Maryland. On February 23, 2011, this lease was amended and now expires on July 31, 2014 and provides us with an ongoing annual option to terminate the lease. Monthly rent for the facility ranges from $27,500 to $33,000 throughout the lease term. Additional sales and marketing offices are located in leased office space in San Antonio, Texas. Monthly rent there is approximately $7,000 and the lease expires in November 2011. West coast sales and fulfillment are facilitated by our Company-owned 115,000 square-foot Americas Sales & Logistics Center (ALC) located in Reno, Nevada. The ALC is used to configure and fulfill product and supply chain solutions, provide disaster backup for the GLC, and allow for future growth of staffing and increased fulfillment capabilities. While we anticipate the need for additional space, we believe our existing facilities are generally adequate for our current requirements and that suitable additional space will be available as needed to accommodate future expansion of our operations. The GLC is encumbered by a deed of trust as security for a term loan. See Note 8 to our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. Each of our three business segments uses all of our properties for either sales or fulfillment purposes.


Lawsuits and claims are filed against us from time to time in the ordinary course of business. We do not believe that any lawsuits or claims currently pending against the Company, individually or in the aggregate, are material, or will have a material adverse affect on our financial condition or results of operations. In addition, from time to time, we are also subject to review from federal and state taxing authorities in order to validate the amounts of income, sales and/or use taxes which have been claimed and remitted. No federal, state and local income tax returns are currently under examination.


 
 





Our common stock has been publicly traded on the NASDAQ Global Market, since September 28, 1994, under the symbol "TESS." The quarterly range of prices per share during fiscal years 2010 and 2011 are as follows:

   
High
   
Low
   
Dividends Declared
 
Fiscal Year 2011
                 
First Quarter
  $ 20.53     $ 15.05     $ 0.10  
Second Quarter
    18.26       10.00       0.10  
Third Quarter
    16.90       13.94       0.10  
Fourth Quarter
    16.96       10.50       0.10  
                         
Fiscal Year 2010
                       
First Quarter
  $ 8.33     $ 4.66     $ --  
Second Quarter
    12.27       7.07       0.07  
Third Quarter
    12.16       8.77       0.07  
Fourth Quarter
    16.66       10.31       0.07  
 
As of May 20, 2011, the number of shareholders of record of the Company was 87. We estimate that the number of beneficial owners as of that date was approximately 2,072.

On July 28, 2009, we announced that our Board of Directors determined to commence a dividend program and we have since declared dividends on a quarterly basis. Any future declaration of dividends and the establishment of any corresponding record and payment dates remains subject to further determination from time to time by the Board of Directors. Additional information with respect to the quarterly dividends declared in fiscal years 2011 and 2010 is contained in our Selected Financial Data. The declaration and payment of future dividends will depend on many factors, including, but not limited to, our earnings, financial condition, business development needs and regulatory considerations, and is at the discretion of our Board of Directors. Until April 28, 2010, our revolving credit facility limited the amount of cash dividends that we may pay to $2.5 million annually. As of April 28, 2010, this amount was increased to $5.0 million in any twelve month period.

On May 26, 2010, we issued a stock dividend in order to effect a 3-for-2 stock split of our common stock. The share prices and dividend payments above prior to the May 26, 2010 stock split have been retroactively restated to reflect the stock dividend for all periods presented.

During the first quarter of fiscal year 2004, our Board of Directors approved a stock buyback program. As of March 27, 2011, the Board of Directors has authorized the purchase of up to 3,593,350 shares of outstanding common stock under the stock buyback program. Shares may be purchased from time to time in the open market, by block purchase, or through negotiated transactions, or possibly other transactions managed by broker-dealers. No time limit has been set for completion or expiration of the program. Through the end of the fiscal year 2011, we had repurchased 3,505,187 shares through the program for approximately $30.7 million, or an average price of $8.76 per share. Of the total shares repurchased, 2,300 were repurchased in fiscal year 2011 at an average price of $13.96 per share and 36,195 were repurchased in fiscal year 2010 at an average price of $9.91 per share. An aggregate of 88,163 shares remain available for repurchase under this program. No repurchases were made in any month during the fourth quarter of fiscal year 2011. We also withhold shares from our employees and directors from time to time to facilitate employees’ minimum federal and state tax withholdings related to vested performance stock units, restricted stock and exercised stock options. For fiscal years 2011 and 2010 this totaled $1,536,900 and $126,500, respectively.
 
In addition to the shares repurchased in the stock buyback program discussed immediately above, we repurchased all 705,000 shares of our common stock held by Brightpoint, Inc. in a privately negotiated transaction on July 1, 2008 for approximately $6.4 million, or $9.09 per share. Our revolving credit facility and term loan with Wells Fargo Bank, National Association (formerly Wachovia Bank, National Association) and SunTrust Bank limit to $25.0 million the aggregate dollar value of shares that may be repurchased from May 31, 2007 forward. At March 27, 2011, we had the ability to repurchase approximately $11.3 million in additional shares of our common stock without violating this covenant.

The information required by Item 201(d) of Regulation S-K, pursuant to paragraph (a) of this Item 5, is incorporated by reference to the information set forth under the caption “Equity Compensation Plan Information” in the Company’s Proxy Statement for the 2011 Annual Meeting of Shareholders, which is anticipated to be filed pursuant to Regulation 14A no later than one hundred twenty (120) days following the end of the fiscal year reported on.



Stock Performance Graph

The graph set forth below shows the value of an investment of $100 on March 26, 2006 in each of the Company’s Common Stock, the Russell 2000 Index and a peer group for the period of March 26, 2006 to March 27, 2011. The graph assumes that all dividends, if any, were reinvested.
 
      
Stock Performance Graph
   
 
 

   
3/26/2006
   
4/1/2007
   
3/30/2008
   
3/29/2009
   
3/28/2010
   
3/27/2011
 
TESSCO Technologies Incorporated
  $ 100.00     $ 223.83     $ 123.96     $ 65.20     $ 196.40     $ 151.34  
Russell 2000
    100.00       107.56       92.92       59.34       95.18       116.89  
Peer Group 1
    100.00       101.84       96.31       75.84       116.17       147.79  
1 – The peer group consists of the following: Brightpoint, Inc., Ingram Micro Inc., W.W. Grainger, Inc., Anixter International Inc., ScanSource Inc., InfoSonics Corporation and Tech Data Corporation.

The peer group was selected based on a review of publicly available information about these companies and the Company’s determination that they are engaged in business similar to that of the Company.


   
Fiscal Years Ended
 
   
March 27, 2011
   
March 28, 2010
   
March 29, 2009
   
March 30, 2008
   
April 1, 2007
 
STATEMENT OF INCOME DATA
                             
Revenues
  $ 605,219,200     $ 522,031,500     $ 483,007,200     $ 520,968,200     $ 492,327,800  
Cost of goods sold
    471,938,600       398,706,300       361,155,000       403,978,800       370,916,400  
Gross profit
    133,280,600       123,325,200       121,852,200       116,989,400       121,411,400  
Selling, general and administrative expenses
    117,305,100       108,269,000       110,656,400       108,875,700       109,208,800  
Income from operations
    15,975,500       15,056,200       11,195,800       8,113,700       12,202,600  
Interest, net
    420,600       318,300       664,300       574,100       879,400  
Income before provision for income taxes
    15,554,900       14,737,900       10,531,500       7,539,600       11,323,200  
Provision for income taxes
    5,536,700       5,599,100       4,203,500       2,720,900       4,281,100  
Net income
  $ 10,018,200     $ 9,138,800     $ 6,328,000     $ 4,818,700     $ 7,042,100  
Diluted earnings per share (1)(2)
  $ 1.27     $ 1.19     $ 0.82     $ 0.58     $ 0.77  
Cash dividends declared per common share (1)
  $ 0.40     $ 0.20     $ --     $ --     $ --  
                                         
Percentage of Revenues
                                       
Revenues
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
Cost of goods sold
    78.0       76.4       74.8       77.5       75.3  
Gross profit
    22.0       23.6       25.2       22.5       24.7  
Selling, general and administrative expenses
    19.4       20.7       22.9       20.9       22.2  
Income from operations                                            
    2.6       2.9       2.3       1.6       2.5  
Interest, net
    0.1       0.1       0.1       0.1       0.2  
Income before provision for income taxes
    2.6       2.8       2.2       1.4       2.3  
Provision for income taxes
    0.9       1.1       0.9       0.5       0.9  
Net income
    1.7 %     1.8 %     1.3 %     0.9 %     1.4 %
 
SELECTED OPERATING DATA
                                       
Average commercial buyers per month
    12,700       12,400       12,200       12,300       11,900  
Average consumer buyers per month
    700       800       1,500       3,200       7,100  
Return on assets (3)
    6.4 %     6.8 %     4.8 %     3.6 %     5.6 %
Return on equity (4)
    13.5 %     14.1 %     10.5 %     8.2 %     11.5 %
 
BALANCE SHEET DATA
                                       
Working capital
  $ 51,837,800     $ 46,793,200     $ 36,625,000     $ 36,714,400     $ 33,527,300  
Total assets
    161,160,600       151,346,700       118,652,600       143,798,600       123,682,700  
Short-term debt
    359,100       380,000       361,400       3,713,900       356,200  
Long-term debt
    2,959,100       3,328,000       3,481,700       3,842,600       4,203,200  
Shareholders' equity
    78,880,100       69,645,200       60,166,200       60,151,600       57,151,300  

(1)  
All per share numbers prior to March 27, 2011 have been retroactively restated for all periods presented to reflect the May 26, 2010 stock dividend in order to effect a 3-for-2 stock split.
(2)  
Diluted earnings per share prior to March 28, 2010 have been adjusted to show the effects of adoption of the FASB standard addressing accounting for participating securities under the two-class method. See Notes 2 and 14 to the Consolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K for the fiscal year ended March 27, 2011 for further discussion.
(3)  
Net income divided by the average total assets. 
(4)  
Net income divided by the average total equity.


 

Quarterly Results of Operations (Unaudited)


 
Fiscal Year 2011 Quarters Ended
Fiscal Year 2010 Quarters Ended
      Mar. 27, 2011        Dec. 26, 2010         Sept 26, 2010         Jun. 27, 2010         Mar. 28, 2010         Dec. 27, 2009         Sept. 27, 2009         Jun. 28, 2009  
Revenues
  $ 130,300,200     $ 167,940,000     $ 165,026,400     $ 141,952,600     $ 130,555,300     $ 149,721,200     $ 132,953,700     $ 108,801,300  
Cost of goods sold
    99,942,400       134,137,000       128,256,400       109,602,800       100,647,600       116,932,800       101,340,200       79,785,700  
Gross profit
    30,357,800       33,803,000       36,770,000       32,349,800       29,907,700       32,788,400       31,613,500       29,015,600  
Selling, general and administrative expenses
    27,724,000       29,465,800       31,203,600       28,911,700       27,245,600       27,939,700       27,322,300       25,761,400  
Income from operations
    2,633,800       4,337,200       5,566,400       3,438,100       2,662,100       4,848,700       4,291,200       3,254,200  
Interest, net
    94,100       118,900       129,800       77,800       42,100       90,600       76,300       109,300  
Income before provision for income taxes
    2,539,700       4,218,300       5,436,600       3,360,300       2,620,000       4,758,100       4,214,900       3,144,900  
Provision income taxes
    897,900       1,257,100       2,090,900       1,290,800       893,000       1,850,900       1,622,400       1,232,800  
Net income
  $ 1,641,800     $ 2,961,200     $ 3,345,700     $ 2,069,500     $ 1,727,000     $ 2,907,200     $ 2,592,500     $ 1,912,100  
Diluted earnings per share(1)
  $ 0.21     $ 0.38     $ 0.43     $ 0.26     $ 0.22     $ 0.37     $ 0.34     $ 0.25  
Cash dividends declared per common share (1)
  $ 0.10     $ 0.10     $ 0.10     $ 0.10     $ 0.07     $ 0.07     $ 0.07     $ --  
                                                                 
Percentage of Revenues
                                                               
Revenues
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
Cost of goods sold
    76.7       79.9       77.7       77.2       77.1       78.1       76.2       73.3  
Gross profit
    23.3       20.1       22.3       22.8       22.9       21.9       23.8       26.7  
Selling, general and administrative expenses
    21.3       17.5       18.9       20.4       20.9       18.7       20.6       23.7  
Income from operations
    2.0       2.6       3.4       2.4       2.0       3.2       3.2       3.0  
Interest, net
    0.1       0.1       0.1       0.1       0.0       0.1       0.1       0.1  
Income before provision for income taxes
    1.9       2.5       3.3       2.4       2.0       3.2       3.2       2.9  
Provision for income taxes
    0.7       0.7       1.3       0.9       0.7       1.2       1.2       1.1  
Net income
    1.3 %     1.8 %     2.0 %     1.5 %     1.3 %     1.9 %     1.9 %     1.8 %
SELECTED OPERATING DATA
                                                               
Average commercial buyers per month
    12,500       12,700       13,000       12,800       12,300       12,400       12,500       12,200  
Average consumer buyers per month
    700       700       700       700       800       700       800       800  
Return on assets (2)
    3.9 %     6.5 %     7.6 %     5.2 %     4.5 %     7.5 %     7.3 %     6.1 %
Return on equity (3)
    8.5 %     15.7 %     18.4 %     11.8 %     10.1 %     17.5 %     16.3 %     12.5 %

(1)  
All per share numbers prior to June 27, 2010 have been retroactively restated for all periods presented to reflect the May 26, 2010 stock dividend in order to effect a 3-for-2 stock split..
(2)  
Net income divided by the average total assets.
(3)  
Net income divided by the average total equity.



This Management’s Discussion and Analysis of Results of Operations and Financial Condition (MD&A) should be read in conjunction with the other sections of this Annual Report on Form 10-K, including Part I, “Item 1: Business,” Part II, “Item 6: Selected Financial Data,” and Part II, “Item 8: Financial Statements and Supplementary Data.” The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing, including Part I, “Item 1A: Risk Factors.” Our actual results may differ materially from those described in any such forward-looking statement.

Business Overview and Environment

TESSCO Technologies Incorporated (TESSCO, we, or the Company) architects and delivers innovative product and value chain solutions to support wireless systems. Although we sell products to customers in over 100 countries, approximately 97% of our sales are to customers in the United States. We have operations and office facilities in Hunt Valley, Maryland, Reno, Nevada and San Antonio, Texas.
 
We offer a wide range of products that are classified into three business segments: network infrastructure; mobile devices and accessories; and installation, test and maintenance. Network infrastructure products, which are sold to our commercial customers, are used to build, repair and upgrade wireless telecommunications, computing and Internet networks. Sales of traditional network infrastructure products, such as base station radios, cable, transmission lines and antennas are in part dependent on capital spending in the wireless communications industry. However, we have also been growing our offering of wireless broadband, network equipment, security and surveillance products, which are not as dependent on the overall capital spending of the industry. Mobile devices and accessory products include cellular phone and data device accessories, as well as two-way radios and related accessories. Mobile devices and accessory products are widely sold to commercial customers and consumers. Commercial customers include retail stores, value-added resellers and dealers. Consumers are primarily reached through our affinity partnerships, where we offer services including customized order fulfillment, outsourced call centers, and building and maintaining private label Internet sites. Approximately 47% of all of our mobile devices and accessory products sales for fiscal year 2011 were generated from the sales of accessory products to AT&T Mobility. Installation, test and maintenance products, which are sold to our commercial customers, are used to install, tune, maintain and repair wireless communications equipment. This segment is made up of sophisticated analysis equipment and various frequency-, voltage- and power-measuring devices, replacement parts and components as well as an assortment of tools, hardware and supplies required by service technicians.

We view our customer base in four major categories:

·  
Commercial Public Carriers and Network Operators. Public carriers and network operators include systems operators that are generally responsible for building and maintaining the infrastructure system and providing airtime service to individual subscribers.
·  
Commercial Resellers. Resellers include dealers and resellers that sell, install and/or service cellular telephone, wireless networking, broadband and two-way radio communications equipment. These resellers include local and national value-added resellers and retailers, as well as sales and installation centers operated by cellular and paging carriers.
·  
Commercial Self-Maintained Users (SMUs) and Governments. SMUs and government customers include commercial entities such as major utilities and transportation companies, federal agencies and state and local governments.
·  
Consumers. Consumers are customers buying through any of our affinity-partner relationships or directly from our consumer website, YourWirelessSource.comTM.

 
The wireless communications distribution industry is competitive and fragmented, and is comprised of several national distributors. In addition, many manufacturers sell direct. Barriers to entry for distributors are relatively low, particularly in the mobile devices and accessory market, and the risk of new competitors entering the market is high. Consolidation of larger wireless carriers has and will most likely continue to impact our current and potential customer base. In addition, the agreements or arrangements with our customers or vendors looking to us for product and supply chain solutions are typically of limited duration and are terminable by either party upon several months or otherwise short notice. Our ability to maintain these relationships is subject to competitive pressures and challenges. We believe, however, that our strength in service, the breadth and depth of our product offering, our information technology system, our large customer base and our purchasing relationships with approximately 380 manufacturers provide us with a significant competitive advantage over new entrants to the market. 
 
Results of Operations

The following tables summarize the results of our operations for fiscal years 2011, 2010 and 2009:

(Dollars in thousands, except per share data)
             
2010 to 2011
         
2009 to 2010
 
   
2011
   
2010
   
$ Change
   
% Change
   
2009
   
$ Change
   
% Change
 
Commercial Revenues
                                         
 Network Infrastructure:
                                         
Public Carriers and Network Operators
  $ 65,965     $ 52,731     $ 13,234       25.1 %   $ 46,591     $ 6,140       13.2 %
Resellers                                                    
    89,154       70,631       18,523       26.2 %     72,952       (2,321 )     (3.2 %)
SMUs and Governments                     
    72,176       56,665       15,511       27.4 %     53,445       3,220       6.0 %
 Total Network Infrastructure                       
    227,295       180,027       47,268       26.3 %     172,988       7,039       4.1 %
                                                         
 Mobile Devices and Accessories:
                                                       
Public Carriers and Network Operators
    2,410       2,178       232       10.7 %     2,094       84       4.0 %
Resellers                                                    
    298,317       257,191       41,126       16.0 %     205,867       51,324       24.9 %
SMUs and Governments                 
    16,179       14,451       1,728       12.0 %     14,334       117       0.8 %
 Total Mobile Devices and Accessories
    316,906       273,820       43,086       15.7 %     222,295       51,525       23.2 %
                                                         
 Installation, Test and Maintenance:
                                                       
Public Carriers and Network Operators
    18,240       10,655       7,585       71.2 %     12,874       (2,219 )     (17.2 %)
Resellers                                                    
    8,000       7,078       922       13.0 %     9,476       (2,398 )     (25.3 %)
SMUs and Governments                      
    21,356       36,152       (14,796 )     (40.9 %)     54,173       (18,021 )     (33.3 %)
 Total Installation, Test and Maintenance
    47,596       53,885       (6,289 )     (11.7 %)     76,523       (22,638 )     (29.6 %)
Total Commercial Revenues      
    591,797       507,732       84,065       16.6 %     471,806       35,926       7.6 %
Consumer Revenues – Mobile Devices and Accessories
    13,422       14,300       (878 )     (6.1 %)     11,201       3,099       27.7 %
Total Revenues                         
  $ 605,219     $ 522,032     $ 83,187       15.9 %   $ 483,007     $ 39,025       8.1 %



(Dollars in thousands, except per share data)
             
2010 to 2011
         
2009 to 2010
 
   
2011
   
2010
   
$ Change
   
% Change
   
2009
   
$ Change
   
% Change
 
Commercial Gross Profit
                                         
 Network Infrastructure:
                                         
Public Carriers and Network Operators
  $ 15,754     $ 12,442     $ 3,312       26.6 %   $ 11,912     $ 530       4.4 %
Resellers                                                    
    24,608       19,589       5,019       25.6 %     20,583       (994 )     (4.8 %)
SMUs and Governments              
    19,899       15,639       4,260       27.2 %     14,861       778       5.2 %
 Total Network Infrastructure                   
    60,261       47,670       12,591       26.4 %     47,356       314       0.7 %
                                                         
 Mobile Devices and Accessories:
                                                       
Public Carriers and Network Operators
    608       563       45       8.0 %     596       (33 )     (5.5 %)
Resellers                                                    
    52,299       54,000       (1,701 )     (3.2 %)     47,573       6,427       13.5 %
SMUs and Governments                  
    4,173       4,121       52       1.3 %     4,564       (443 )     (9.7 %)
 Total Mobile Devices and Accessories
    57,080       58,684       (1,604 )     (2.7 %)     52,733       5,951       11.3 %
                                                         
 Installation, Test and Maintenance:
                                                       
Public Carriers and Network Operators
    3,503       2,554       949       37.2 %     2,973       (419 )     (14.1 %)
Resellers                                                    
    2,124       1,699       425       25.0 %     2,466       (767 )     (31.1 %)
SMUs and Governments                   
    5,607       8,162       (2,555 )     (31.3 %)     12,445       (4,283 )     (34.4 %)
 Total Installation, Test and Maintenance
    11,234       12,415       (1,181 )     (9.5 %)     17,884       (5,469 )     (30.6 %)
Total Commercial Gross Profit                     
    128,575       118,769       9,806       8.3 %     117,973       796       0.7 %
Consumer Gross Profit – Mobile Devices and Accessories
    4,706       4,556       150       3.3 %     3,879       677       17.5 %
Total Gross Profit                  
  $ 133,281     $ 123,325     $ 9,956       8.1 %   $ 121,852     $ 1,473       1.2 %
                                                         
Selling, general and administrative expenses
  $ 117,305     $ 108,269     $ 9,036       8.3 %   $ 110,656     $ (2,387 )     (2.2 %)
Income from operations              
    15,976       15,056       920       6.1 %     11,196       3,860       34.5 %
Interest, net
    421       318       103       32.4 %     664       (346 )     (52.1 %)
Income before provision for income taxes
    15,555       14,738       817       5.5 %     10,532       4,206       39.9 %
Provision for income taxes
    5,537       5,599       (62 )     (1.1 %)     4,204       1,395       33.2 %
Net income                      
  $ 10,018     $ 9,139     $ 879       9.6 %   $ 6,328     $ 2,811       44.4 %
                                                         
Diluted earnings per share (1)(2)
  $ 1.27     $ 1.19     $ 0.08       6.7 %   $ 0.82     $ 0.37       45.1 %
(1)  
All earnings per share numbers prior to March 27, 2011 have been retroactively restated for all periods presented to reflect the May 26, 2010 stock dividend in order to effect a 3-for-2 stock split.
(2)  
Effective March 30, 2009, we retrospectively adopted the FASB standard addressing accounting for participating securities under the two-class method.  See Notes 2 and 14 to the Consolidated Financial Statements for a discussion of the impact of the change in accounting standards.


Fiscal Year 2011 Compared to Fiscal Year 2010


The 26.3% increase in our network infrastructure sales from fiscal year 2010 to fiscal year 2011 is primarily attributable to an increase in sales of radio frequency (RF) propagation and site support products, and to a lesser extent, sales of broadband products. Our growth in sales of network infrastructure product was across all of our market categories, as we have continued to focus on diversification beyond the traditional infrastructure carrier customer.

Our mobile devices and accessories revenues, including both commercial and consumer sales, increased 14.6% for fiscal year 2011 compared to fiscal year 2010. We experienced a significant increase in commercial sales of mobile devices and accessory products. Commercial revenues for mobile devices and accessories, which are sold primarily to resellers, but are also sold to SMUs, governments and public carriers and network operators, increased 15.7% over the prior year. Fiscal year 2011 sales to AT&T Mobility were essentially flat compared to fiscal year 2010. Therefore, the sales increase in our mobile devices and accessories line of business for fiscal 2011 was attributable to increased sales to other smaller resellers as compared to fiscal 2010.

Revenues from our installation, test and maintenance line of business decreased 11.7% in fiscal year 2011 as compared to the prior fiscal year, primarily due to a decline in sales of repair parts related to our repair components relationship with Nokia, partially offset by increased sales of test and bench equipment and safety products. As discussed in prior reports, effective September 30, 2010, Nokia had terminated our arrangement with them. Accordingly, revenues and gross profits from this relationship have ceased. During fiscal year 2011, revenues from the Nokia relationship represented less than 1% of total consolidated revenues, as compared to approximately 3% in fiscal year 2010. Sales of test and bench equipment and safety products increased across all of our market categories.

Gross Profit. >Gross profit increased 8.1% in fiscal year 2011 compared to fiscal year 2010, driven by an increase in our network infrastructure commercial business segment, partially offset by a decline in our mobile devices and accessories and installation, test and maintenance commercial lines of business. Total commercial gross profit increased 8.3%, while consumer gross profits increased 3.3%. Gross profit margin decreased to 22.0% in fiscal year 2011, from 23.6% in fiscal year 2010. Except as noted below, our gross margins by product within each segment have generally been sustained, and variations are mostly related to sales mix within the segment product offerings. Gross profit margin in our network infrastructure segment remained flat at 26.5% in fiscal year 2011 as compared to fiscal year 2010. In our installation, test and maintenance segment, gross profit margin increased to 23.6% in fiscal year 2011, from 23.0% in fiscal year 2010, partially due to the change in the structure of our Nokia arrangement as discussed above.  Gross profit margin in our mobile devices and accessories segment decreased to 18.7% in fiscal year 2011, from 21.9% in fiscal year 2010. This decrease is primarily attributable to the commercial gross profit margin for our mobile devices and accessories segment, which decreased from 21.4% for fiscal year 2010 to 18.0% for fiscal year 2011, principally due to pricing pressures on sales to AT&T Mobility as discussed below. The gross profit margin for our consumer sales increased from 31.9% to 35.1% in fiscal year 2011. We account for inventory at the lower of cost or market, and as a result, write-offs/write-downs occur due to damage, deterioration, obsolescence, changes in prices and other causes.

As total revenues and gross profits from larger customer and vendor relationships increase, we occasionally experience and expect to continue to experience, pricing pressures that may adversely affect future results. We are currently experiencing pricing pressures from our large tier-one carrier customer, AT&T Mobility, and as discussed elsewhere, future business with this customer is at risk. During the second half of fiscal year 2011, we experienced lower purchasing volumes and significant pricing pressure from AT&T Mobility and expect this trend to continue. In addition, based on communications from AT&T, we also face planned business model changes from them. As a result of the lower volumes and pricing pressure, gross margins declined in the second half of fiscal year 2011, impacting our net profits. These factors will continue to put pressure on our net profits, and the planned business model changes put our current and future business with this significant customer at risk.  The nature of our business is that our relationships with most customers and suppliers, including AT&T Mobility, typically contain no ongoing purchase or sale obligations and are terminable by either party upon relatively short notice.  In an effort to mitigate the overall effect of these pressures and to meet these consistent challenges, we are focused on our continuing efforts to grow revenues and gross profits from other customer and vendor relationships.
 
During fiscal year 2006, we began sourcing a significant portion of our private branded product line directly from factories in China. All of such purchases are denominated in U.S. dollars. We have been increasing the amount of products and services sold under TESSCO’s private labels. While sales of these directly sourced products and services represented only 10% of our total sales in fiscal year 2011, we believe that this direct sourcing initiative has allowed us to realize lower costs of goods sold on sales of these products, after accounting for additional supply chain costs and lead times. We also believe that these cost savings have allowed us to be more competitive in the market. 

Our ongoing ability to earn revenues and gross profits from customers and vendors looking to us for product and supply chain solutions is dependent upon a number of factors. The terms, and accordingly the factors, applicable to each relationship often differ. Among these factors are the strength of the customer’s or vendor’s business, the supply and demand for the product or service, including price stability, changing customer or vendor requirements, and our ability to support the customer or vendor and to continually demonstrate that we can improve the way they do business. In addition, the agreements or arrangements on which our customer and vendor relationships are based are typically of limited duration, typically do not include any obligation in respect of any specific product purchase or sale and are terminable by either party upon several months or otherwise short notice. Our customer relationships could also be affected by wireless carrier consolidation or the global financial crisis.


The largest factors contributing to the increase in total selling, general and administrative expenses during fiscal year 2011 were increased compensation, freight out and marketing and sales promotion expenses.

Compensation expenses primarily related to business generation activities increased from fiscal year 2010 to fiscal year 2011. However, the increase in compensation expenses was partially offset by decreased accruals related to our cash and equity bonus programs. Our bonus programs are generally performance-based, and therefore, the decrease in bonus accruals is due to lower results during fiscal year 2011 as compared to pre-defined targets. Compensation costs also included $400,000 of severance expense associated with certain job consolidations that occurred in the fourth quarter of fiscal 2011. Total compensation costs, including benefits and bonus expense, increased by approximately $4.4 million, or 6.8%, from fiscal year 2010 to fiscal year 2011.

Freight expenses in fiscal year 2011 increased approximately $2.6 million, or 21.3%, over the prior year, primarily due to higher sales and increased orders shipped.

Marketing and sales promotion expenses increased approximately $602,700, or 6.6%, over the prior year, primarily due to increased market development funds expensed in relation to our AT&T and other retailer arrangements, partially offset by decreased expenses related to our hard copy catalog, The Wireless Guide®.

We continually evaluate the credit worthiness of our existing customer receivable portfolio and provide an appropriate reserve based on this evaluation. We also evaluate the credit worthiness of prospective and current customers and make decisions regarding extension of credit terms to such customers based on this evaluation. Accordingly, we recorded a provision for bad debts of $1,050,500 and $743,500 for fiscal year 2011 and fiscal year 2010, respectively. During fiscal year 2010, we experienced lower bad debt expense in part due to recoveries of amounts previously reserved or written off.

 


Fiscal Year 2010 Compared to Fiscal Year 2009


Our mobile devices and accessories revenues, including both commercial and consumer sales, increased 23.4% for fiscal year 2010 compared to fiscal year 2009. We experienced a significant increase in commercial and consumer sales of mobile devices and accessory products. Commercial revenues for mobile devices and accessories, which are sold primarily to resellers, but are also sold to SMUs, governments and public carriers and network operators, increased 23.2% over the prior year, due in part to higher sales to AT&T Mobility, our largest customer, as well as other smaller resellers and public carriers and network operators.

The 4.1% increase in our network infrastructure sales from fiscal year 2009 to fiscal year 2010 is primarily attributable to an increase in sales of broadband products, and to a much lesser extent, sales of radio frequency (RF) propagation and site support products. Our growth in sales of network infrastructure product was in sales to public carriers and network operations as well as SMUs and governments, as we have continued to focus on diversification beyond the traditional infrastructure carrier customer.

Revenues from our installation, test and maintenance line of business decreased 29.6% in fiscal year 2010 as compared to the prior fiscal year, primarily due to a decline in sales of repair parts related to our repair components relationship with Nokia, as well as decreased sales of test and bench equipment and safety products. As discussed above and in prior reports, Nokia had terminated our arrangement effective September 30, 2010. Accordingly, revenues and gross profits from this relationship have ceased. During fiscal year 2010, revenues from the Nokia relationship represented approximately 3% of total consolidated revenues.

Gross Profit. >Gross profit increased 1.2% in fiscal year 2010 compared to fiscal year 2009, driven by an increase in our network infrastructure and mobile devices and accessories commercial business segments, partially offset by a decline in our installation, test and maintenance commercial line of business. Total commercial gross profit increased 0.7%, while consumer gross profits increased 17.5%. Gross profit margin decreased to 23.6% in fiscal year 2010, from 25.2% in fiscal year 2009. Except as noted below, our gross margins by product within each segment have generally been sustained and variations are mostly related to sales mix within the segment product offerings. Gross profit margin decreased to 26.5% in fiscal year 2010 in our network infrastructure segment, from 27.4% in fiscal year 2009. This decrease in gross profit margin is the result of the change in product mix described above, as broadband products typically have a lower gross margin than radio frequency and site support products, which had a smaller increase in sales as compared to sales of broadband products. In our installation, test and maintenance segment, gross profit margin decreased to 23.0% in fiscal year 2010, from 23.4% in fiscal year 2009, partially due to the change in the structure of our Nokia arrangement as discussed above.  Gross profit margin in our mobile devices and accessories segment decreased to 21.9% in fiscal year 2010, from 24.2% in fiscal year 2009. This decrease is primarily attributable to the commercial gross profit margin for our mobile devices and accessories segment, which decreased from 23.7% for fiscal year 2009 to 21.4% for fiscal year 2010, principally due to product and customer mix in sales. The gross profit margin for our consumer sales decreased from 34.6% to 31.9% in fiscal year 2010. We account for inventory at the lower of cost or market, and as a result, write-offs/write-downs occur due to damage, deterioration, obsolescence, changes in prices and other causes.

 
During fiscal year 2006, we began sourcing a significant portion of our private branded product line directly from factories in China. All of such purchases are denominated in U.S. dollars. We have been increasing the amount of products and services sold under TESSCO’s private labels. While sales of these directly sourced products and services represented only 11% of our total sales in fiscal year 2010, we believe that this direct sourcing initiative has allowed us to realize lower costs of goods sold on sales of these products, after accounting for additional supply chain costs and lead times. We also believe that these cost savings have allowed us to be more competitive in the market. 

Our ongoing ability to earn revenues and gross profits from customers and vendors looking to us for product and supply chain solutions is dependent upon a number of factors. The terms, and accordingly the factors, applicable to each relationship often differ. Among these factors are the strength of the customer’s or vendor’s business, the supply and demand for the product or service, including price stability, changing customer or vendor requirements, and our ability to support the customer or vendor and to continually demonstrate that we can improve the way they do business. In addition, the agreements or arrangements on which our customer and vendor relationships are based are typically of limited duration, typically do not include any obligation in respect of any specific product purchase or sale and are terminable by either party upon several months or otherwise short notice. Our customer relationships could also be affected by wireless carrier consolidation or the global financial crisis.

As total revenues and gross profits from larger customer and vendor relationships increase, we occasionally experience and expect to continue to experience, pricing pressures that may adversely affect future results. We are currently experiencing pricing pressures from our large tier-one carrier, AT&T Mobility, and as discussed elsewhere, future business with this customer is at risk. In an effort to mitigate the overall effect of these pressures and to meet these consistent challenges, we are focused on our continuing efforts to grow revenues and gross profits from other customer and vendor relationships.


The largest factors contributing to the decrease in total selling, general and administrative expenses during fiscal year 2010 were decreased freight out and corporate support expenses, partially offset by increased compensation expenses.

Freight expenses in fiscal year 2010 decreased approximately $1.4 million, or 10.2%, over the prior year, primarily due to increased efficiencies in our distribution operations and reduced rates.

Corporate support expenses decreased approximately $1.5 million, or 18.2%, over the prior year, primarily due to lower recruiting and bad debt expenses. Professional fees also declined, but were primarily offset by higher consulting services expenses. The decrease in bad debt expenses is discussed in more detail below.
 
Compensation expenses primarily related to operation and fulfillment activities decreased from fiscal year 2009 to fiscal year 2010. However, the decrease in compensation costs was more than offset by increased accruals related to our cash and equity bonus programs. Our bonus programs are performance based, and therefore, the increase in bonus accruals is due to improved results during fiscal year 2010, as applied to pre-defined performance targets. Total compensation costs, including benefits and bonus expense, increased by approximately $0.7 million, or 1.2%, from fiscal year 2009 to fiscal year 2010.

 
We continually evaluate the credit worthiness of our existing customer receivable portfolio and provide an appropriate reserve based on this evaluation. We also evaluate the credit worthiness of prospective and current customers and make decisions regarding extension of credit terms to such customers based on this evaluation. Accordingly, we recorded a provision for bad debts of $743,500 and $1,593,600 for fiscal year 2010 and fiscal year 2009, respectively. During fiscal year 2010, we experienced lower bad debt expense in part due to recoveries of amounts previously reserved or written off and lower reserves anticipated due to our current assessment of our customers’ ability to pay their open balances.  During fiscal year 2009, bad debt expense was higher due to additional reserves needed largely related to the downturn in the economy.



Liquidity and Capital Resources

In summary, our cash flows were as follows:

   
2011
   
2010
   
2009
 
Cash flow provided by operating activities
  $ 12,038,100     $ 14,811,000     $ 15,155,800  
Cash flow used in investing activities
    (7,694,200 )     (5,440,100 )     (4,538,400 )
Cash flow used in financing activities
    (3,824,400 )     (2,312,000 )     (12,103,800 )
Net increase (decrease) in cash and cash equivalents
  $ 519,500     $ 7,058,900     $ (1,486,400 )

In fiscal year 2011, our cash inflow from operating activities was driven by net income (net of depreciation and amortization and non-cash stock compensation expense), as well as an increase in trade accounts payable, partially offset by an increase in trade accounts receivables and a decrease in accrued payroll, benefits and taxes. The increase in trade accounts payable is largely due to the timing and credit terms of inventory receipts. The increase in trade accounts receivable is primarily due to the timing of sales and collections, as well as the fact that we have granted extended payment terms to certain large customers. The decrease in accrued payroll, benefits and taxes is primarily due to the decline in bonuses accrued for fiscal year 2011 as compared to 2010.
 
Cash flows used in investing activities were largely comprised of capital expenditures, which primarily consisted of investments in information technology as well as leasehold improvements and furniture and fixtures for our leased office space in Hunt Valley, Maryland.  In addition to investments in capital expenditures, cash flow used in investing activities was also impacted by cash earn-out payments under our acquisition agreement with TerraWave Solutions, Ltd. and GigaWave Technologies, Ltd. On April 21, 2006, we acquired substantially all the non-cash net assets of TerraWave Solutions, Ltd. and its commonly owned affiliate, GigaWave Technologies, Ltd. for an initial cash payment of approximately $3.9 million, and potential additional cash earn-out payment obligations accruing over a four-year period, contingent on the achievement by the TerraWave/GigaWave business unit post-acquisition of certain minimum earnings thresholds. During fiscal year 2011, approximately $2.9 million in earn-out payments were made, based on the achievement of certain earnings thresholds during the final year of the four-year earn-out period under the acquisition agreement. The total purchase price of the acquisition, including earn-out payments, was approximately $13.1 million.

 
Cash flows used in financing activities were primarily related to cash dividends paid to shareholders and repurchases of treasury stock purchases and stock from employees and directors for minimum tax withholdings related to equity compensation, partially offset by the excess tax benefit from stock-based compensation. During fiscal year 2011, we purchased 2,300 shares of our outstanding common stock pursuant to our stock buyback program, compared with 36,195 shares purchased in fiscal year 2010. From the beginning of our stock buyback program (the first quarter of fiscal year 2004), through the end of fiscal year 2011, a total of 3,505,187 shares have been purchased under this program for approximately $30.7 million, or an average price of $8.76 per share. The Board of Directors has authorized the purchase of up to 3,593,350 shares in the aggregate, and therefore, 88,163 shares remained available to be purchased as of the end of fiscal year 2011. We expect to fund future purchases, if any, from working capital and/or our revolving credit facility. No timetable has been set for the completion or expiration of this program. We also withhold shares from our employees and directors, at their request, equal to the minimum federal and state tax withholdings related to vested performance stock units. For fiscal years 2011 and 2010 this totaled $1,536,900 and $126,500, respectively.

We have a term loan in the original principal amount of $4.5 million from Wells Fargo Bank, National Association (formerly Wachovia Bank, National Association) and SunTrust Bank, that is payable in monthly installments of principal and interest with the balance due at maturity, which until the loan was recently modified as described below, was scheduled for June 30, 2011. The note bears interest at a floating rate of LIBOR plus 1.75% until June 30, 2011, whereupon the modified terms, as described below, take effect. The note is secured by a first position deed of trust encumbering the Company-owned real property in Hunt Valley, Maryland. The loan is subject to generally the same financial covenants as are applicable to our revolving credit facility, and had a balance of $3.0 million as of March 27, 2011.

On October 1, 2005, we entered into a receive variable/pay fixed interest rate swap on a total notional amount of $4.2 million with Wells Fargo Bank, National Association (formerly Wachovia Bank, National Association) to avoid the risks associated with fluctuating interest rates on our existing term bank loan discussed above, and to eliminate the variability in the cash outflow for interest payments. The interest rate swap agreement locks the interest rate for the outstanding principal balance of the loan at 6.38% through June 30, 2011. There was no payment due or received at inception of the swap. No hedge ineffectiveness will be recognized as the interest rate swap provisions match the applicable provisions of the term bank loan. This cash flow hedge qualified for hedge accounting using the short-cut method since the swap terms match the critical terms of the hedged debt.

On May 20, 2011, but effective July 1, 2011, we entered into a loan modification agreement with Wells Fargo Bank, National Association, and SunTrust Bank, to extend maturity date of the term loan to July 1, 2016. The key provisions of the loan otherwise remain the same, except that, commencing July 1, 2011, the note will bear interest at a floating rate of LIBOR plus 2.00%.

We are also party to an unsecured revolving credit facility with SunTrust Bank and Wells Fargo Bank, National Association (formerly Wachovia Bank, National Association), with interest payable monthly and any principal balance outstanding, at the LIBOR rate plus an applicable margin. Borrowing availability under this facility is determined in accordance with a borrowing base and the applicable credit agreement includes financial covenants, including a minimum tangible net worth, minimum cash flow coverage of debt service, and a maximum funded debt to EBITDA ratio. The terms applicable to our revolving credit facility and term loan also limit our ability to engage in certain transactions or activities, including (but not limited to) investments and acquisitions, sales of assets, payment of dividends, issuance of additional debt and other matters. As of March 27, 2011, we had a zero balance outstanding on our $35.0 million revolving credit facility; therefore, we had $35.0 million available on our revolving line of credit facility subject to the limitations imposed by the borrowing base and our continued compliance with the other applicable terms, including the covenants discussed above.

This revolving credit facility has been amended several times since its inception and now allows for repurchase by us from inception of up to $25.0 million of our common stock, and allows for the payment of up to $5.0 million of dividends in any 12 month period. As of March 27, 2011, we had the ability to repurchase approximately $11.3 million in additional shares of our common stock without violating this covenant. The financial covenants associated with this credit facility and the related term loan have also been modified. See Note 7 to the Consolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K for the fiscal year ended March 27, 2011 for additional information regarding this credit facility.

 
Pursuant to the relevant documents, the financial covenants included in the Credit Agreement for the unsecured revolving credit facility are also applicable to our existing Term Loan with the same lenders. Accordingly, the amendments to the Credit Agreement also have the effect of amending the financial covenants applicable to the Term Loan.

On March 31, 2009, we entered into a term loan with the Baltimore County Economic Development Revolving Loan Fund for an aggregate principal amount of $250,000. The term loan is payable in equal monthly installments of principal and interest of $2,300, with the balance due at maturity on April 1, 2019. The term loan bears interest at 2.00% per annum and is secured by a subordinate position on our Hunt Valley, Maryland facility. At March 27, 2011, the principal balance of this term loan was approximately $207,800.

We are also party to a note payable outstanding to the Maryland Economic Development Corporation, which is payable in equal quarterly installments of principal and interest of $37,400, with the balance due at maturity on October 10, 2011. The note bears interest at 3.00% per annum and is secured by a subordinate position on Company-owned real property location in Hunt Valley, Maryland. At March 27, 2011, the principal balance of this note was approximately $110,400.

Working capital (current assets less current liabilities) increased to $51.8 million as of March 27, 2011, from $46.8 million as of March 28, 2010, primarily due to the increase in accounts receivable partially offset by increased accounts payable. Shareholders' equity increased to $78.9 million as of March 27, 2011, from $69.6 million as of March 28, 2010, primarily due to increased retained earnings due to fiscal year 2011 net income and net increases in additional paid-in-capital.

We believe that our existing cash, payments from customers, and availability under our revolving line of credit facility will be sufficient to support our operations for at least the next twelve months. To minimize interest expense, our policy is to use excess available cash to pay down any balance on our revolving line of credit facility. We expect to meet short-term and long-term liquidity needs through operating cash flow, supplemented by our revolving credit facility. In doing so, the balance on our revolving credit facility could increase depending on our working capital and other cash needs. If we were to undertake an acquisition or other major capital purchases that require funds in excess of its existing sources of liquidity, we would look to sources of funding from additional credit facilities, debt and/or equity issuances. There can be no assurances that such additional future sources of funding would be available on terms acceptable to us, if at all. As of March 27, 2011, we do not have any material capital expenditure commitments.

In addition, our liquidity could be negatively impacted by decreasing revenues and profits resulting from a decrease in demand for our products or a reduction in capital expenditures by our customers, or by the weakened financial conditions of our customers or suppliers, in each case as a result of the downturn in the global economy, among other factors.

In fiscal year 2010, our cash inflow from operating activities was driven by net income, net of depreciation and amortization and non-cash stock compensation expense, as well as a significant increase in trade accounts payable and an increase in accrued payroll, benefits and taxes, partially offset by significant increases in trade accounts receivables and product inventory. The increase in trade accounts payable is largely due to the timing and credit terms of inventory receipts. The accrual for payroll, benefits and taxes increased primarily due to an increase in accruals for our bonus programs in fiscal year 2010 as compared to fiscal year 2009. The increase in trade accounts receivable is primarily due to the timing of sales and collections largely related to our largest customer, AT&T Mobility. The increased inventory levels are to improve our inventory availability for our customers.

Capital expenditures totaled $3.1 million and $3.4 million in fiscal years 2010 and 2009, respectively.  In both fiscal years, capital expenditures primarily related to investments in information technology.

 
During fiscal year 2010, we purchased 36,195 shares of our outstanding common stock pursuant to our stock buyback program, compared with 255,231 shares purchased in fiscal year 2009.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of our operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
 
We have identified the policies below as critical to our business operations and the understanding of our results of operations:

Revenue Recognition. We record revenues when 1) persuasive evidence of an arrangement exists, 2) delivery has occurred or services have been rendered, 3) our price to the buyer is fixed and determinable, and 4) collectibility is reasonably assured. Our revenue recognition policy includes evidence of arrangements for significant revenue transactions through either receipt of a customer purchase order or a web-based order. We record revenues when risk of loss has passed to the customer. In most cases, shipments are made using FOB shipping terms. For a portion of our sales, we use FOB destination terms and record the revenue when the product is received by the customer. Our prices are always fixed at the time of sale. Historically, there have not been any material concessions provided to or by customers, future discounts, or other incentives subsequent to a sale. We sell under normal commercial terms and, therefore, we only record revenues on transactions where collectibilty is reasonably assured.

Because a large portion of our sales transactions meets the conditions set forth in the Financial Accounting Standards Board (“FASB”) standard on revenue recognition, we recognize revenues from sales transactions containing sales returns provisions at the time of the sale. These conditions require that 1) our price be substantially fixed and determinable at the date of sale, 2) the buyer is obligated to pay us, and such obligation is not contingent on their resale of the product, 3) the buyer’s obligation to us does not change in the event of theft or physical destruction or damage of the product, 4) the buyer has economic substance apart from us, 5) we do not have significant obligations for futur