TRANSCAT INC - Quarter Report: 2008 September (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 27, 2008

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

For the transition period from                     to                     

Transcat, Inc.

(Exact name of registrant as specified in its charter)

Ohio		16-0874418
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

(Address of principal executive offices) (Zip Code)

(Registrant’s telephone number, including area code)

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 þ No 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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
		(Do not check if a smaller reporting company)

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

The number of shares of common stock, par value $0.50 per share, of the registrant outstanding as of November 5, 2008 was 7,365,486.

 

 

		Page(s)
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Statements of Operations and Comprehensive Income for the Second Quarter and Six Months Ended September 27, 2008 and September 29, 2007			3
Balance Sheets as of September 27, 2008 and March 29, 2008			4
Statements of Cash Flows for the Six Months Ended September 27, 2008 and September 29, 2007			5
Statements of Shareholders’ Equity for the Six Months Ended September 27, 2008			6
Notes to Consolidated Financial Statements			7-12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk			23
Item 4. Controls and Procedures			23
PART II. OTHER INFORMATION
Item 1A. Risk Factors			23-24
Item 4. Submission of Matters to a Vote of Security Holders			24-25
Item 5. Other Information			25
Item 6. Exhibits			25
SIGNATURES			26
INDEX TO EXHIBITS			27
EX-3.1
EX-10.1
EX-10.2
EX-10.3
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In Thousands, Except Per Share Amounts)

		(Unaudited)								(Unaudited)
		Second Quarter Ended								Six Months Ended
		September 27,				September 29,				September 27,				September 29,
		2008				2007				2008				2007
Product Sales		$	12,954			$	11,219			$	25,265			$	22,146
Service Revenue			5,656				5,406				11,198				10,669
Net Revenue			18,610				16,625				36,463				32,815
Cost of Products Sold			9,568				8,089				18,517				15,955
Cost of Services Sold			4,468				4,290				8,847				8,387
Total Cost of Products and Services Sold			14,036				12,379				27,364				24,342
Gross Profit			4,574				4,246				9,099				8,473
Selling, Marketing and Warehouse Expenses			2,122				2,018				4,717				4,323
Administrative Expenses			1,713				1,634				3,255				3,107
Total Operating Expenses			3,835				3,652				7,972				7,430
Operating Income			739				594				1,127				1,043
Interest Expense			28				29				27				63
Other Expense, net			4				209				12				290
Total Other Expense			32				238				39				353
Income Before Income Taxes			707				356				1,088				690
Provision for Income Taxes			277				162				430				258
Net Income			430				194				658				432
Other Comprehensive (Loss) Income			(11	)			265				(3	)			457
Comprehensive Income		$	419			$	459			$	655			$	889
Basic Earnings Per Share		$	0.06			$	0.03			$	0.09			$	0.06
Average Shares Outstanding			7,282				7,127				7,239				7,099
Diluted Earnings Per Share		$	0.06			$	0.03			$	0.09			$	0.06
Average Shares Outstanding			7,511				7,577				7,453				7,474

See accompanying notes to consolidated financial statements.

TRANSCAT, INC.

(In Thousands, Except Share and Per Share Amounts)

		(Unaudited)
		September 27,				March 29,
		2008				2008
ASSETS
Current Assets:
Cash		$	184			$	208
Accounts Receivable, less allowance for doubtful accounts of $70 and $56 as of September 27, 2008 and March 29, 2008, respectively			9,105				9,346
Other Receivables			938				370
Inventory, net			5,844				5,442
Prepaid Expenses and Other Current Assets			1,227				773
Deferred Tax Asset			462				248
Total Current Assets			17,760				16,387
Property and Equipment, net			3,563				3,211
Goodwill			7,460				2,967
Intangible Asset			1,191				–
Deferred Tax Asset			1,190				1,435
Other Assets			367				344
Total Assets		$	31,531			$	24,344
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable		$	6,064			$	5,947
Accrued Compensation and Other Liabilities			2,921				2,489
Income Taxes Payable			296				62
Total Current Liabilities			9,281				8,498
Long-Term Debt			4,347				302
Other Liabilities			503				427
Total Liabilities			14,131				9,227
Shareholders’ Equity:
Common Stock, par value $0.50 per share, 30,000,000 shares authorized; 7,633,694 and 7,446,223 shares issued as of September 27, 2008 and March 29, 2008, respectively; 7,357,912 and 7,170,441 shares outstanding as of September 27, 2008 and March 29, 2008, respectively			3,817				3,723
Capital in Excess of Par Value			8,183				6,649
Accumulated Other Comprehensive Income			433				436
Retained Earnings			5,955				5,297
Less: Treasury Stock, at cost, 275,782 shares as of September 27, 2008 and March 29, 2008			(988	)			(988	)
Total Shareholders’ Equity			17,400				15,117
Total Liabilities and Shareholders’ Equity		$	31,531			$	24,344

See accompanying notes to consolidated financial statements.

TRANSCAT, INC.

(In Thousands)

		(Unaudited)
		Six Months Ended
		September 27,				September 29,
		2008				2007
Cash Flows from Operating Activities:
Net Income		$	658			$	432
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Deferred Income Taxes			55				(85	)
Depreciation and Amortization			772				788
Provision for (Recovery of) Accounts Receivable and Inventory Reserves			84				(63	)
Stock–Based Compensation Expense			355				428
Changes in Assets and Liabilities:
Accounts Receivable and Other Receivables			654				892
Inventory			(40	)			749
Prepaid Expenses and Other Assets			(710	)			(602	)
Accounts Payable			(269	)			104
Accrued Compensation and Other Liabilities			(601	)			(595	)
Income Taxes Payable			45				174
Net Cash Provided by Operating Activities			1,003				2,222
Cash Flows from Investing Activities:
Purchase of Property and Equipment			(587	)			(999	)
Purchase of Westcon, Inc., net of cash acquired			(4,625	)			–
Net Cash Used in Investing Activities			(5,212	)			(999	)
Cash Flows from Financing Activities:
Chase Revolving Line of Credit, net			4,026				(1,576	)
Issuance of Common Stock			119				160
Excess Tax Benefits Related to Stock–Based Compensation			41				–
Net Cash Provided by (Used in) Financing Activities			4,186				(1,407	)
Effect of Exchange Rate Changes on Cash			(1	)			15
Net Decrease in Cash			(24	)			(169	)
Cash at Beginning of Period			208				357
Cash at End of Period		$	184			$	188
Supplemental Disclosures of Cash Flow Activity:
Cash paid during the period for:
Interest		$	18			$	69
Income Taxes, net		$	260			$	177
Supplemental Disclosure of Non–Cash Investing Activity:
Stock Issued in Connection with Business Acquisition		$	1,113			$	–

See accompanying notes to consolidated financial statements.

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In Thousands)
(Unaudited)

										Capital
		Common Stock								In				Accumulated								Treasury Stock
		Issued								Excess				Other								Outstanding
		$0.50 Par Value								of Par				Comprehensive				Retained				at Cost
		Shares				Amount				Value				Income				Earnings				Shares				Amount				Total
Balance as of March 29, 2008			7,446			$	3,723			$	6,649			$	436			$	5,297				276			$	(988	)		$	15,117
Issuance of Common Stock			188				94				1,138																				1,232
Stock-Based Compensation											355																				355
Tax Benefit from Stock-Based Compensation											41																				41
Comprehensive Income:
Currency Translation Adjustment															(7	)															(7	)
Unrecognized Prior Service Cost, net of tax															4																4
Net Income																			658												658
Balance as of September 27, 2008			7,634			$	3,817			$	8,183			$	433			$	5,955				276			$	(988	)		$	17,400

See accompanying notes to consolidated financial statements.

TRANSCAT, INC.

(In Thousands, Except Per Share Amounts)

(Unaudited)

NOTE 1 – GENERAL

Description of Business: Transcat, Inc. (“Transcat” or the “Company”) is a leading global distributor of professional grade test and measurement instruments and a provider of calibration, 3-D metrology and repair services to the life science, manufacturing, utility and process industries.

Basis of Presentation: Transcat’s unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, the Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. The results for the interim periods are not necessarily indicative of the results to be expected for the fiscal year. The accompanying Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements as of and for the fiscal year ended March 29, 2008 (“fiscal year 2008”) contained in the Company’s 2008 Annual Report on Form 10-K filed with the SEC.

Principles of Consolidation: The Consolidated Financial Statements of Transcat include the accounts of Transcat and its wholly-owned subsidiaries, Transmation (Canada) Inc. and Westcon, Inc. (“Westcon”). All significant intercompany balances and transactions have been eliminated in consolidation.

On August 14, 2008, Transcat, through its wholly-owned subsidiary Transcat Acquisition Corp. (“Transcat Acquisition”), acquired Westcon, an Oregon corporation, by merger with and into Transcat Acquisition, which was the surviving entity. Concurrent with the closing of the merger, Transcat Acquisition’s name was changed to Westcon. See Note 5 for further information on the acquisition.

Stock-Based Compensation: In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), the Company measures the cost of services received in exchange for all equity awards granted, including stock options, warrants and restricted stock, based on the fair market value of the award as of the grant date. The Company uses the modified prospective application method to record compensation cost related to unvested stock awards as of March 25, 2006 by recognizing the unamortized grant date fair value of the awards over the remaining service periods of those awards with no change in historical reported earnings. Awards granted after March 25, 2006 are valued at fair value and are recognized on a straight line basis over the service periods of each award. Excess tax benefits from the exercise of stock awards are presented in the Consolidated Statements of Cash Flows as a financing activity. Excess tax benefits are realized benefits from tax deductions for exercised awards in excess of the deferred tax asset attributable to stock-based compensation costs for such awards. The Company did not have any stock-based compensation costs capitalized as part of an asset. The Company estimates forfeiture rates based on its historical experience.

The estimated fair value of the awards granted during the first six months of the fiscal year ending March 28, 2009 (“fiscal year 2009”) was calculated using the Black-Scholes-Merton pricing model (“Black-Scholes”), which produced a weighted average fair value of awards granted of $4.02 per share. During the second quarter and the first six months of fiscal year 2009, the Company recorded non-cash stock-based compensation in the amount of $0.2 million and $0.4 million, respectively, in the Consolidated Statements of Operations and Comprehensive Income.

The following summarizes the assumptions used in the Black-Scholes model during the first six months of fiscal year 2009:

Expected life		6 years
Annualized volatility rate			61.3	%
Risk-free rate of return			3.3	%
Dividend rate			0.0	%

The Black-Scholes model incorporates assumptions to value stock-based awards. The risk-free rate of return for periods within the contractual life of the award is based on a zero-coupon U.S. government instrument over the contractual term of the equity instrument. Expected volatility is based on historical volatility of the Company’s stock. The expected option term represents the period that stock-based awards are expected to be outstanding based on the simplified method provided in Staff Accounting Bulletin No. 107 (“SAB 107”), which averages an award’s weighted-average vesting period and expected term

for “plain vanilla” share options. Under SAB 107, options are considered to be “plain vanilla” if they have the following basic characteristics: granted “at-the-money” exercisability is conditioned upon service through the vesting date; termination of service prior to vesting results in forfeiture; limited exercise period following termination of service; and options are non-transferable and non-hedgeable. In December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”), which was effective January 1, 2008. SAB 110 expresses the views of the Staff of the SEC regarding extending the use of the simplified method, as discussed in SAB 107, in developing an estimate of the expected term of “plain vanilla” share options in accordance with SFAS 123R. The Company will continue to use the simplified method until it has the historical data necessary to provide a reasonable estimate of expected life in accordance with SAB 107, as amended by SAB 110. For the expected term, the Company has “plain vanilla” stock options, and therefore used a simple average of the vesting period and the contractual term for options granted subsequent to January 1, 2006 as permitted by SAB 107.

Foreign Currency Translation and Transactions: The accounts of Transmation (Canada) Inc. are maintained in the local currency and have been translated to United States dollars in accordance with SFAS No. 52, Foreign Currency Translation. Accordingly, the amounts representing assets and liabilities, except for equity, have been translated at the period-end rates of exchange and related sales and expense amounts have been translated at average rates of exchange during the period. Gains and losses arising from translation of Transmation (Canada) Inc.’s balance sheets into United States dollars are recorded directly to the accumulated other comprehensive income component of shareholders’ equity.

Transcat records foreign currency gains and losses on Canadian business transactions. The net foreign currency loss was less than $0.1 million in the first six months of fiscal year 2009 and $0.3 million in the first six months of fiscal year 2008. The Company periodically enters into foreign exchange forward contracts to reduce the risk that its earnings would be adversely affected by changes in currency exchange rates. The contracts are accounted for in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company does not apply hedge accounting and therefore, the change in the fair value of the contracts, which totaled less than $0.1 million during the second quarter and the first six months of fiscal year 2009, was recognized in current earnings as a component of other expense in the Consolidated Statements of Operations and Comprehensive Income. The change in the fair value of the contracts is offset by the change in fair value on the underlying accounts receivable being hedged. On September 27, 2008, the Company had a foreign exchange forward contract, set to mature in October 2008, outstanding in the notional amount of $0.3 million. The Company does not use hedging arrangements for speculative purposes.

Earnings Per Share: Basic earnings per share of common stock is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock reflect the assumed conversion of dilutive stock options, warrants, and unvested restricted stock awards. In computing the per share effect of assumed conversion, funds which would have been received from the exercise of options and warrants are considered to have been used to purchase shares of common stock at the average market prices during the period, and the resulting net additional shares of common stock are included in the calculation of average shares of common stock outstanding.

For the second quarter and the first six months of fiscal years 2009 and 2008, the net additional common stock equivalents had no effect on the calculation of dilutive earnings per share. The total number of dilutive and anti-dilutive common stock equivalents resulting from stock options, warrants and unvested restricted stock are summarized as follows:

		Second Quarter Ended								Six Months Ended
		September 27,				September 29,				September 27,				September 29,
		2008				2007				2008				2007
Shares Outstanding:
Dilutive			229				450				214				375
Anti-dilutive			559				626				574				701
Total			788				1,076				788				1,076
Range of Exercise Prices per Share:
Options		$	2.20-$7.72			$	1.50-$7.72			$	2.20-$7.72			$	1.50-$7.72
Warrants		$	2.83-$5.80			$	1.50-$5.80			$	2.83-$5.80			$	1.50-$5.80

Reclassification of Amounts: Certain reclassifications of financial information for the prior fiscal year have been made to conform to the presentation for the current fiscal year.

Recently Issued Accounting Pronouncements: In October 2008, the Financial Accounting Standards Board issued Staff Position No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (“FSP 157-3”). FSP 157-3 applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with SFAS No. 157, Fair Value Measurements (“SFAS 157”). FSP 157-3 clarifies the application of SFAS 157 in determining the fair values of assets or liabilities in a market that is not active. FSP 157-3 is effective upon issuance, including prior periods for which financial statements have not been issued. The adoption of FSP 157-3 did not have a material impact on the Company’s Consolidated Financial Statements.

NOTE 2 – DEBT

Description. On August 14, 2008, Transcat amended its credit agreement (the “Chase Credit Agreement”) with JPMorgan Chase Bank, N.A. The amendment to the Chase Credit Agreement provides for an increase in the amount available under the revolving credit facility (the “Revolving Credit Facility”) from $10 million to $15 million, an extension of the maturity date from November 2009 to August 2011 and an increase in interest and commitment fees. All other terms were unchanged. As of September 27, 2008, $4.3 million was outstanding and $10.7 million was available under the Chase Credit Agreement.

Interest and Commitment Fees. Interest on the Revolving Credit Facility accrues, at Transcat’s election, at either a base rate (defined as the highest of prime, a three month certificate of deposit plus 1%, or the federal funds rate plus ¹/2 of 1%) or the London Interbank Offered Rate, in each case, plus a margin. Commitment fees accrue based on the average daily amount of unused credit available on the Revolving Credit Facility. Interest and commitment fees are adjusted on a quarterly basis based upon the Company’s calculated leverage ratio, as defined in the Chase Credit Agreement. The Company’s interest rate for the first six months of fiscal year 2009 ranged from 3.0% to 4.6%. If the Chase Credit Agreement, as amended, had been in effect for the entire six month fiscal period ended September 27, 2008, the Company’s interest rate would have ranged from 3.3% to 4.8%.

Covenants. The Chase Credit Agreement has various financial and non-financial covenants with which the Company must comply, including a fixed charge ratio covenant and a leverage ratio covenant. The Company was in compliance with all loan covenants and requirements throughout the first six months of fiscal year 2009.

Other Terms. The Company has pledged all of its U.S. tangible and intangible personal property and the common stock of Transmation (Canada) Inc. and Westcon as collateral security for the loans made under the Revolving Credit Facility.

NOTE 3 – STOCK-BASED COMPENSATION

The Transcat, Inc. 2003 Incentive Plan (the “2003 Plan”), provides for, among other awards, grants of restricted stock and stock options to directors, officers and key employees to purchase common stock at no less than the fair market value at the date of grant. In addition, Transcat maintains a warrant plan for directors (the “Directors’ Warrant Plan”).

Stock Options: Options generally vest over a period of up to four years and expire up to ten years from the date of grant. Beginning in the second quarter of fiscal year 2008, options granted to executive officers vest using a graded schedule of 0% in the first year, 20% in each of the second and third years, and 60% in the fourth year. Prior options granted to executive officers vested equally over three years. The expense relating to these executive officer options is recognized on a straight-line basis over the requisite service period for the entire award.

The following table summarizes the stock options as of and for the first six months ended September 27, 2008:

						Weighted				Weighted Average
		Number				Average				Remaining				Aggregate
		Of				Price Per				Contractual				Intrinsic
		Shares				Share				Term (in years)				Value
Outstanding as of March 29, 2008			656			$	5.64
Granted			20				6.75
Exercised			(1	)			2.89
Cancelled/Forfeited			(4	)			6.35
Outstanding as of September 27, 2008			671				5.68				8			$	1,068
Exercisable as of September 27, 2008			287				4.02				7				873

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the second quarter of fiscal year 2009 and the exercise price, multiplied by the number of in-the-money stock options) that would have been received by the option holders had all option

holders exercised their options on September 27, 2008. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s stock.

Total unrecognized compensation cost related to non-vested stock options as of September 27, 2008 was $1.2 million, which is expected to be recognized over a weighted average period of 2 years. The aggregate intrinsic value of stock options exercised during the first six months of fiscal year 2009 was less than $0.1 million. Cash received from the exercise of options was less than $0.1 million during the first six months of fiscal year 2009.

Restricted Stock: The 2003 Plan also allows the Company to grant stock awards. During the first six months of fiscal year 2009, the Company granted performance-based restricted stock awards in place of stock options as a primary component of executive compensation. The performance-based restricted stock awards vest after three years subject to certain cumulative diluted earnings per share growth over the eligible three-year period. During the second quarter of fiscal year 2009 and in conjunction with the acquisition of Westcon, the Company modified these awards by increasing the cumulative diluted earnings per share growth performance condition. The modification did not have an impact on the Company’s Consolidated Financial Statements.

The following table summarizes stock awards as of and for the first six months ended September 27, 2008:

						Weighted
						Average
		Number				Price
		Of Shares				Per Share
Unvested Balance as of March 29, 2008			–			$	–
Granted			53				6.80
Vested			–				–
Unvested Balance as of September 27, 2008			53				6.80

Total expense relating to restricted stock awards, based on fair market value, was less than $0.1 million in the first six months of fiscal year 2009. Unearned compensation totaled $0.3 million as of September 27, 2008. The number of shares available for future grant under the 2003 Plan totaled 0.3 million at September 27, 2008.

Warrants: Under the Directors’ Warrant Plan, as amended, warrants have been granted to non-employee directors to purchase common stock at the fair market value at the date of grant. Warrants vest over a three year period and expire in five years from the date of grant. All warrants authorized for issuance pursuant to the Directors’ Warrant Plan have been granted. Warrants outstanding on September 27, 2008 continue to vest and be exercisable in accordance with the terms of the Directors’ Warrant Plan.

The following table summarizes warrants as of and for the first six months ended September 27, 2008:

						Weighted				Weighted Average
		Number				Average				Remaining				Aggregate
		Of				Price Per				Contractual				Intrinsic
		Shares				Share				Term (in years)				Value
Outstanding as of March 29, 2008			99			$	3.75
Granted			–				–
Exercised			(30	)			2.55
Cancelled/Forfeited			(4	)			5.25
Outstanding as of September 27, 2008			65				4.23				2			$	179
Exercisable as of September 27, 2008			59				4.09				2				173

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the second quarter of fiscal year 2009 and the exercise price, multiplied by the number of in-the-money warrants) that would have been received by the warrant holders had all warrant holders exercised their warrants on September 27, 2008. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s stock. The aggregate intrinsic value of warrants exercised during the first six months of fiscal year 2009 was $0.1 million. Cash received from the exercise of warrants was $0.1 million during the first six months of fiscal year 2009.

NOTE 4 – SEGMENT INFORMATION

Transcat has two reportable segments: Distribution Products (“Product”) and Calibration Services (“Service”). The Company has no inter-segment sales. The following table presents segment information for the second quarter and the six months ended September 27, 2008 and September 29, 2007:

		Second Quarter Ended								Six Months Ended
		September 27,				September 29,				September 27,				September 29,
		2008				2007				2008				2007
Net Revenue:
Product Sales		$	12,954			$	11,219			$	25,265			$	22,146
Service Revenue			5,656				5,406				11,198				10,669
Total			18,610				16,625				36,463				32,815
Gross Profit:
Product			3,386				3,130				6,748				6,191
Service			1,188				1,116				2,351				2,282
Total			4,574				4,246				9,099				8,473
Operating Expenses:
Product			2,321				2,217				4,735				4,580
Service			1,514				1,435				3,237				2,850
Total			3,835				3,652				7,972				7,430
Operating Income			739				594				1,127				1,043
Unallocated Amounts:
Other Expense, net			32				238				39				353
Provision for Income Taxes			277				162				430				258
Total			309				400				469				611
Net Income		$	430			$	194			$	658			$	432

NOTE 5 – ACQUISITION

On August 14, 2008, Transcat, through its wholly-owned subsidiary Transcat Acquisition, acquired Westcon pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) with Westcon and its sole stockholder. Westcon is a distributor of professional grade test and measurement instruments and a provider of calibration and repair services to customers located primarily in the western region of the United States.

Pursuant to the Merger Agreement, Westcon merged with and into Transcat Acquisition. Concurrent with the closing of the merger, Transcat Acquisition’s name was changed to Westcon.

Under the terms of the Merger Agreement, Transcat paid an aggregate purchase price of approximately $6.9 million, which was paid in a combination of the issuance of 150,000 shares of Transcat common stock valued at approximately $1.1 million and approximately $5.8 million in cash. A portion of the cash purchase price, aggregating $0.5 million, was distributed to satisfy certain debt obligations of Westcon, with the remainder being paid to the sole stockholder. An additional contingent payment of up to $1.4 million is subject to holdback restrictions and is intended to secure the obligations of Westcon and the sole stockholder for post-closing adjustments, reimbursement and indemnification under the terms of the Merger Agreement. This contingent payment is expected to be recorded as additional purchase price at the time the payment is certain.

In addition, Transcat and the sole stockholder entered into an Earn Out Agreement dated as of the closing of the merger. This agreement provides that the sole stockholder may be entitled to certain contingent earn out payments subject to continued employment and Westcon achieving certain post-closing gross profit and revenue targets. These potential future payments are expected to be recorded as compensation expense in the period earned.

The following is a summary of the preliminary purchase price allocation:

Purchase Price Paid:
Cash Paid to Seller at Closing		$	4,216
Westcon Debt Paid by Transcat at Closing			466
Fair Value of Common Stock Issued			1,113
Cash Paid to Seller in November 2008			1,017
Direct Acquisition Costs			116
Total Purchase Price		$	6,928
Allocation of Purchase Price:
Intangible Asset – Customer Base		$	1,206
Goodwill			4,498
			5,704
Plus: Current Assets			1,675
Non-Current Assets			274
Less: Current Liabilities			(658	)
Non-Current Liabilities			(67	)
Total Purchase Price		$	6,928

Assets and liabilities of the acquired business are recorded under the purchase method of accounting at their estimated fair values as of the date of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying net assets of the acquired business. Other intangible assets, namely customer base, represent an allocation of purchase price to identifiable intangible assets of the acquired business. Intangible assets are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of 10 years. Goodwill and the intangible assets are not deductible for tax purposes.

The primary reasons for the Company’s acquisition of Westcon and the principal factors that contribute to the recognition of goodwill are the strengthening of the Company’s presence in the western region of the United States and/or the synergies and related cost savings gained from the integration of the acquired operation.

The results of operations of Westcon are included in Transcat’s consolidated operating results as of the date the business was acquired. The following unaudited pro forma results assume the acquisition occurred at the beginning of each period presented. The pro forma results do not purport to represent what the Company’s results of operations actually would have been if the transactions set forth had occurred on the date indicated or what the Company’s results of operations will be in future periods.

		(Unaudited)								(Unaudited)
		Second Quarter Ended								Six Months Ended
		September 27,				September 29,				September 27,				September 29,
		2008				2007				2008				2007
Net Revenue		$	19,614			$	19,731			$	39,613			$	37,875
Net Income		$	404			$	364			$	514			$	452
Basic Earnings Per Share		$	0.06			$	0.05			$	0.07			$	0.06
Diluted Earnings Per Share		$	0.05			$	0.05			$	0.07			$	0.06

NOTE 6 – COMMITMENTS

Concurrent with the acquisition of Westcon, the Company entered into an agreement to lease property in Portland, Oregon for Westcon’s calibration laboratory. The facility, which is owned by an officer of the Company, the former sole stockholder of Westcon, is being leased under a non-cancelable operating lease over a three year period commencing on the acquisition date. The minimum future annual rental payments related to this lease are approximately $0.1 million per year.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements. This report and, in particular, the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this report, contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These include statements concerning expectations, estimates, and projections about the industry, management beliefs and assumptions of Transcat, Inc. (“Transcat”, “we”, “us”, or “our”). Words such as “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates”, and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to forecast. Therefore, our actual results may materially differ from those expressed or forecasted in any such forward-looking statements. When considering these risks, uncertainties and assumptions, you should keep in mind the cautionary statements elsewhere in this report and in any documents incorporated herein by reference. New risks and uncertainties arise from time to time and we cannot predict those events or how they may affect us. For a more detailed discussion of the risks and uncertainties that may affect Transcat’s operating and financial results and its ability to achieve its financial objectives, interested parties should review the “Risk Factors” sections in Transcat’s reports filed with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended March 29, 2008. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Accounts Receivable: Accounts receivable represent receivables from customers in the ordinary course of business. These amounts are recorded net of the allowance for doubtful accounts and returns in our Consolidated Balance Sheets. The allowance for doubtful accounts is based upon the expected collectibility of accounts receivable. We apply a specific formula to our accounts receivable aging, which may be adjusted on a specific account basis where the specific formula may not appropriately reserve for loss exposure. After all attempts to collect a receivable have failed, the receivable is written-off against the allowance for doubtful accounts. The returns reserve is calculated based upon the historical rate of returns applied to sales over a specific timeframe. The returns reserve will increase or decrease as a result of changes in the level of sales and/or the historical rate of returns.

Stock-Based Compensation. In accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, we measure the cost of services received in exchange for all equity awards granted, including stock options, warrants and restricted stock, based on the fair market value of the award as of the grant date. We use the modified prospective application method to record compensation cost related to unvested stock awards as of March 25, 2006 by recognizing the unamortized grant date fair value of these awards over the remaining service periods of those awards with no change in historical reported earnings. Awards granted after March 25, 2006 are valued at fair value and are recognized on a straight line basis over the service periods of each award. Excess tax benefits from the exercise of stock awards are presented in the Consolidated Statements of Cash Flows as a financing activity. Excess tax benefits are realized benefits from tax deductions for exercised awards in excess of the deferred tax asset attributable to stock-based compensation costs for such awards. We did not have any stock-based compensation costs capitalized as part of an asset. We estimate forfeiture rates based on our historical experience.

Options generally vest over a period of up to four years and expire up to ten years from the date of grant. Beginning in the second quarter of fiscal year 2008, options granted to executive officers vest using a graded schedule of 0% in the first year, 20% in each of the second and third years, and 60% in the fourth year. Prior options granted to executive officers vested equally over three years. The expense relating to these executive officer options is recognized on a straight-line basis over the requisite service period for the entire award.

During the first six months of fiscal year 2009, we granted performance-based restricted stock awards in place of options as a primary component of executive compensation. The performance-based restricted stock awards vest after three years subject to certain cumulative diluted earnings per share growth over the eligible three-year period. During the second quarter of fiscal year 2009 and in conjunction with the acquisition of Westcon, we modified these awards by increasing the cumulative diluted earnings per share growth performance condition. The modification did not have an impact on our Consolidated Financial Statements.

Revenue Recognition. Product sales are recorded when a product’s title and risk of loss transfers to the customer. We recognize the majority of our service revenue based upon when the calibration or repair activity is performed and then shipped and/or delivered to the customer. Some of our service revenue is generated from managing customers’ calibration programs in which we recognize revenue in equal amounts at fixed intervals. We generally invoice our customers for freight, shipping, and handling charges. Provisions for customer returns are provided for in the period the related revenues are recorded based upon historical data.

Reclassification of Amounts: Certain reclassifications of financial information for the prior fiscal year have been made to conform to the presentation for the current fiscal year.

RESULTS OF OPERATIONS

The following table sets forth, for the second quarter and the first six months of fiscal years 2009 and 2008, the components of our Consolidated Statements of Operations as a percentage of our net revenue (calculated on dollars in thousands).

		(Unaudited)								(Unaudited)
		Second Quarter Ended								Six Months Ended
		September 27,				September 29,				September 27,				September 29,
		2008				2007				2008				2007
As a Percentage of Net Revenue:
Product Sales			69.6	%			67.5	%			69.3	%			67.5	%
Service Revenue			30.4	%			32.5	%			30.7	%			32.5	%
Net Revenue			100.0	%			100.0	%			100.0	%			100.0	%
Product Gross Profit			26.1	%			27.9	%			26.7	%			28.0	%
Service Gross Profit			21.0	%			20.6	%			21.0	%			21.4	%
Total Gross Profit			24.6	%			25.5	%			25.0	%			25.8	%
Selling, Marketing and Warehouse Expenses			11.4	%			12.1	%			12.9	%			13.2	%
Administrative Expenses			9.2	%			9.8	%			8.9	%			9.5	%
Total Operating Expenses			20.6	%			21.9	%			21.8	%			22.7	%
Operating Income			4.0	%			3.6	%			3.2	%			3.1	%
Interest Expense			0.2	%			0.2	%			0.1	%			0.2	%
Other Expense, net			–				1.3	%			–				0.9	%
Total Other Expense			0.2	%			1.5	%			0.1	%			1.1	%
Income Before Income Taxes			3.8	%			2.1	%			3.1	%			2.0	%
Provision for Income Taxes			1.5	%			1.0	%			1.2	%			0.8	%
Net Income			2.3	%			1.1	%			1.9	%			1.2	%

SECOND QUARTER ENDED SEPTEMBER 27, 2008 COMPARED TO SECOND QUARTER ENDED SEPTEMBER 29, 2007
(dollars in thousands):

Revenue:

		Second Quarter Ended
		September 27,				September 29,
		2008				2007
Net Revenue:
Product Sales		$	12,954			$	11,219
Service Revenue			5,656				5,406
Total		$	18,610			$	16,625

Net revenue increased $2.0 million, or 11.9%, from the second quarter of fiscal year 2008 to the second quarter of fiscal year 2009.

Our product net sales results accounted for 69.6% of our total net revenue in the second quarter of fiscal year 2009 and 67.5% of our total net revenue in the second quarter of fiscal year 2008. For the second quarter of fiscal year 2009, product sales increased $1.7 million or 15.5% from the second quarter of fiscal year 2008. Product sales by Westcon, since the date of the acquisition, accounted for $0.9 million of this increase. Exclusive of Westcon, our product sales increased 7.6% over the second quarter of fiscal year 2008. Our fiscal years 2009 and 2008 product sales growth in relation to prior fiscal year quarter comparisons is as follows:

		FY 2009									FY 2008
		Q2				Q1					Q4				Q3				Q2				Q1
Product Sales Growth (Decline)			15.5	%			12.7	%				(2.4	%)			5.8	%			13.6	%			3.7	%

Our average product sales per business day increased to $206 in the second quarter of fiscal year 2009, compared with $178 in the second quarter of fiscal year 2008 primarily due to a combination of organic growth and the addition of Westcon in the second quarter of fiscal 2009. Our product sales per business day for each fiscal quarter during the fiscal years 2009 and 2008 are as follows:

		FY 2009									FY 2008
		Q2				Q1					Q4				Q3				Q2				Q1
Product Sales Per Business Day		$	206			$	192				$	197			$	213			$	178			$	171

In the second quarter of fiscal year 2009, our direct distribution channel grew 5.6% year-over-year. The primary drivers of this growth were incremental sales associated with Westcon and increased international sales. Organic sales to our direct U.S. customers were relatively consistent year-over-year, while sales to Canadian customers declined. As a result of the changing geographical customer mix from more profitable Canadian customers to less profitable international customers, our direct distribution channel gross profit percentage decreased 120 basis points from the second quarter of fiscal year 2008 to the second quarter of fiscal year 2009. Within our reseller channel, sales increased 77.6% for the quarter with a slight improvement in gross profit percentage. Approximately 32.5% of the reseller sales dollar growth is attributable to Westcon. As for our organic growth, we believe resellers continue to utilize us for our extensive availability to provide a broad range of new and existing products from within our inventory. As the depth of our products increases, we anticipate continued growth within this channel. The following table reflects the percentage of net sales and the approximate gross profit percentage for significant distribution product channels for the second quarter of fiscal years 2009 and 2008:

		FY 2009 Second Quarter									FY 2008 Second Quarter
		Percent of				Gross					Percent of				Gross
		Net Sales				Profit % (1)					Net Sales				Profit % (1)
Direct			77.6	%			25.8	%				84.9	%			27.0	%
Reseller			20.8	%			18.2	%				13.5	%			18.0	%
Freight Billed to Customers			1.6	%								1.6	%
Total			100.0	%								100.0	%

Customer product orders include orders for products that we routinely stock in our inventory, customized products, and other products ordered less frequently, which we do not stock. Pending product shipments are primarily backorders, but also include products that are requested to be calibrated in our calibration laboratories prior to shipment, orders required to be shipped complete, and orders required to be shipped at a future date. Our total pending product shipments for the second quarter of fiscal year 2009 decreased by approximately $0.3 million, or 17.2% from the second quarter of fiscal year 2008. This decrease is driven by a 21.1% decrease in the outstanding backorders balance, which can be attributed to a greater availability of products through our increased inventory levels. The following table reflects the percentage of total pending product shipments that are backorders at the end of the second quarter of fiscal year 2009 and our historical trend of total pending product shipments:

		FY 2009									FY 2008
		Q2				Q1					Q4				Q3				Q2				Q1
Total Pending Product Shipments		$	1,398			$	1,366				$	1,419			$	1,411			$	1,689			$	1,678
% of Pending Product Shipments That are Backorders			70.7	%			74.7	%				81.5	%			78.1	%			74.1	%			81.0	%

Service revenue increased $0.3 million, or 4.6%, from the second quarter of fiscal year 2008 to the second quarter of fiscal year 2009. Westcon contributed $0.2 million in service revenue in the second quarter of fiscal year 2009. Organic service revenue was relatively flat in the second quarter of fiscal year 2009 compared with the same period of the prior fiscal year. Service revenue in the second quarter of fiscal year 2009 was negatively impacted by Hurricane Ike. In addition to the forced two week shutdown of our largest calibration laboratory and repair center in Houston during the storm and its aftermath, many of our customers in that area postponed or cancelled expected calibration service requests. Additionally, repair service requests, which can be unpredictable from quarter-to-quarter, were down 12.3% year-over-year.

The timing of calibration orders and service segment expenses can vary on a quarter-to-quarter basis based on the nature of a customers’ business and calibration requirements. In general, a trailing twelve month trend provides a better indication of the progress of this segment. Service revenue for the twelve months ended September 27, 2008 was $23.4 million, up 7.7% when compared with $21.8 million for the twelve months ended September 29, 2007. Our fiscal years 2009 and 2008 service revenue growth in relation to prior fiscal year quarter comparisons is as follows:

		FY 2009									FY 2008
		Q2				Q1					Q4				Q3				Q2				Q1
Service Revenue Growth			4.6	%			5.3	%				10.6	%			9.9	%			8.6	%			5.6	%

Within the calibration industry, there is a broad array of measurement disciplines making it costly and inefficient for any one provider to invest the needed capital for facilities, equipment and uniquely trained personnel necessary to perform all calibrations in-house. Our strategy has been to focus our investments in the core electrical, temperature, pressure and dimensional disciplines, and we have historically subcontracted 15% to 20% of our customers’ equipment to outside vendors. In the second quarter of fiscal year 2009, 78.5% of service revenue was generated by our staff of technicians while 18.8% was subcontracted to outside vendors.

		FY 2009 Second									FY 2008 Second
		Quarter									Quarter
						% of									% of
		Service				Service					Service				Service
		Segment				Segment					Segment				Segment
		Revenue				Revenue					Revenue				Revenue
In-House		$	4,441				78.5	%			$	4,266				78.9	%
Outsourced			1,065				18.8	%				995				18.4	%
Freight Billed to Customers			150				2.7	%				145				2.7	%
Total		$	5,656				100.0	%			$	5,406				100.0	%

Gross Profit:

		Second Quarter Ended
		September 27,				September 29,
		2008				2007
Gross Profit:
Product		$	3,386			$	3,130
Service			1,188				1,116
Total		$	4,574			$	4,246

Total gross profit dollars increased 7.7% from the second quarter of fiscal year 2008 to the second quarter of fiscal year 2009. As a percentage of total net revenue, total gross profit declined 90 basis points for the same time period.

Gross profit for our products segment may be influenced by a number of factors including market channel mix, product mix and discounts to customers. Product gross profit in the second quarter of fiscal year 2009 was $3.4 million, or 26.1% of total product sales, compared with $3.1 million, or 27.9% of total product sales, in the second quarter of fiscal year 2008. The reduction in gross profit percentage was attributable to higher international and reseller sales, which have lower profit margin potential, combined with lower sales to Canadian customers, which typically have higher profit margins. The following table reflects the quarterly historical trend of our product gross profit as a percent of total product sales:

		FY 2009									FY 2008
		Q2				Q1					Q4				Q3				Q2				Q1
Product Gross Profit % (1)			24.2	%			23.9	%				24.1	%			25.1	%			25.8	%			24.6	%
Other Income % (2)			1.9	%			3.4	%				3.0	%			3.0	%			2.1	%			3.4	%
Product Gross Profit %			26.1	%			27.3	%				27.1	%			28.1	%			27.9	%			28.0	%

Service gross profit in the second quarter of fiscal year 2009 was $1.2 million, or 21.0% of total service revenue, compared with $1.1 million, or 20.6% of total service revenue, in the same period of the prior fiscal year. Cost control measures were implemented in the quarter to compensate for the lower than expected revenue growth, resulting in relatively flat service gross profit. In general, our gross profit percentage for calibration services fluctuates on a quarterly basis due to the seasonality of our revenues (our fiscal fourth quarter is generally our strongest) and the timing of operating costs associated with our calibration laboratory operations. The following table reflects our service gross profit growth in relation to prior fiscal year quarters:

		FY 2009									FY 2008
		Q2				Q1					Q4				Q3				Q2				Q1
Service Gross Profit Dollar Growth (Decline)			6.5	%			(0.3	%)				32.5	%			14.0	%			5.0	%			3.8	%

Operating Expenses:

		Second Quarter Ended
		September 27,				September 29,
		2008				2007
Operating Expenses:
Selling, Marketing and Warehouse		$	2,122			$	2,018
Administrative			1,713				1,634
Total		$	3,835			$	3,652

Operating expenses increased $0.2 million, or 5.0%, from the second quarter of fiscal year 2008 to the second quarter of fiscal year 2009. Operating expenses as a percent of total revenue decreased from 22.0% in the second quarter of fiscal year 2008 to 20.6% in the second quarter fiscal year 2009. Selling, Marketing and Warehouse expenses increased to $2.1 million

in the second quarter of fiscal year 2009 compared with $2.0 million in the same period of the prior fiscal year, but were down from $2.6 million in the first quarter of fiscal year 2009. Administrative expenses were $1.7 million for the second quarter of fiscal year 2009, which included $0.1 million in expenses for Westcon, compared with $1.6 million for the second quarter of fiscal year 2008 and $1.5 million in the first quarter of fiscal year 2009. Reduced expenses related to variable and stock-based compensation had a positive impact on both selling and administrative expenses compared with the first quarter of fiscal year 2009.

Other Expense:

		Second Quarter Ended
		September 27,				September 29,
		2008				2007
Other Expense:
Interest Expense		$	28			$	29
Other Expense, net			4				209
Total		$	32			$	238

Interest expense in the second quarter of fiscal year 2009 was consistent with the interest expense in the second quarter of fiscal year 2008. Other expenses, consisting primarily of foreign currency net losses, decreased due to a reduction in our intercompany balances.

Taxes:

		Second Quarter Ended
		September 27,				September 29,
		2008				2007
Provision for Income Taxes		$	277			$	162

In the second quarter of fiscal year 2009, we recognized a $0.3 million provision for income taxes, compared to a $0.2 million provision in the second quarter of fiscal year 2008, as a result of an increase in income before income taxes. We continue to evaluate our tax provision on a quarterly basis and make adjustments, as deemed necessary, to our effective tax rate given changes in facts and circumstances expected for the entire fiscal year.

SIX MONTHS ENDED SEPTEMBER 27, 2008 COMPARED TO SIX MONTHS ENDED SEPTEMBER 29, 2007
(dollars in thousands):

Revenue:

		Six Months Ended
		September 27,				September 29,
		2008				2007
Net Revenue:
Product Sales		$	25,265			$	22,146
Service Revenue			11,198				10,669
Total		$	36,463			$	32,815

Net revenue increased $3.6 million, or 11.1%, from the first six months of fiscal year 2008 to the first six months of fiscal year 2009.

Our product net sales, which accounted for 69.3% of our total net revenue in the first six months of fiscal year 2009 and 67.5% of our total net revenue in the first six months of fiscal year 2008, have increased 14.1%. Exclusive of Westcon, product sales in the first six months of fiscal year 2009 were $24.4 million, a 10.1% increase compared to the $22.1 million in product sales in the first six months of fiscal year 2008. Total sales within our direct distribution channel increased 7.7% in the first six months of fiscal year 2009, with organic sales contributing 5.0% of this increase. This increase in organic sales is a result of growth in sales to our U.S. and international customers, partially offset by a decline in sales to our Canadian customers. The decline in Canadian sales, our most profitable channel, and lower margin sales by Westcon have had a negative impact on our overall direct channel gross margin. Our direct channel’s gross profit as a percent of product sales has declined 110 basis points from the first six months of fiscal year 2008 to the first six months of fiscal year 2009.

Within our reseller channel, we experienced a 52.5% increase in total sales and a 40.2% increase in organic sales during the first six months of fiscal year 2009. We attribute this growth to our ability to provide resellers an extensive availability to a broad range of new and existing products from within our inventory. Our reseller sales growth did not come at the expense of declining profit margins within the channel. We experienced a profit margin improvement of 100 basis points in the first six months of fiscal year 2009 compared to the first six months of fiscal year 2008. The following table provides the percentage of net sales and the approximate gross profit percentage for significant distribution product channels for the first six months of fiscal years 2009 and 2008:

		Six Months Ended									Six Months Ended
		September 27, 2008									September 29, 2007
		Percent of				Gross					Percent of				Gross
		Net Sales				Profit % (1)					Net Sales				Profit % (1)
Direct			79.7	%			25.5	%				84.4	%			26.6	%
Reseller			18.7	%			17.9	%				14.0	%			16.9	%
Freight Billed to Customers			1.6	%								1.6	%
Total			100.0	%								100.0	%

Service revenue increased $0.5 million, or 5.0%, from the first six months of fiscal year 2008 to the first six months of fiscal year 2009. Organic service revenue growth for the same time period was 3.0%. Service revenue in the first six months of fiscal year 2009 was negatively impacted by Hurricane Ike, which occurred in our fiscal second quarter, and a 13.7% decline in our repair business. In addition, within any six month period, while we may add new customers, we may also have customers from the prior year whose calibrations may not repeat during the same fiscal period for any number of factors. Among those factors are the variations in the timing of customer periodic calibrations on equipment, customer capital expenditures and customer outsourcing decisions.

Gross Profit:

		Six Months Ended
		September 27,				September 29,
		2008				2007
Gross Profit:
Product		$	6,748			$	6,191
Service			2,351				2,282
Total		$	9,099			$	8,473

Total gross profit dollars increased 7.4% from the first six months of fiscal year 2008 to the first six months of fiscal year 2009. As a percentage of total net revenue, total gross profit declined 80 basis points for the same time period.

Product gross profit increased $0.6 million, or 9.0%, from the first six months of fiscal year 2008 to the first six months of fiscal year 2009, primarily because of a 14.1% increase in product net sales. As a percent of product net sales, product gross profit decreased 130 basis points for the same time period. This is primarily attributable to higher international and reseller sales, which have lower profit potential, combined with lower sales to Canadian customers, which typically have higher profit margins.

Service gross profit increased approximately $0.1 million, or 3.0%, from the first six months of fiscal year 2008 to the first six months of fiscal year 2009. As a percent of service revenue, service gross profit decreased 40 basis points from the first six months of fiscal year 2008 compared to the first six months of fiscal year 2009. In the first six months of fiscal year 2009, cost control measures were put into place to maintain relatively consistent service gross profit percentages, despite lower than expected revenue growth.

Operating Expenses:

		Six Months Ended
		September 27,				September 29,
		2008				2007
Operating Expenses:
Selling, Marketing and Warehouse		$	4,717			$	4,323
Administrative			3,255				3,107
Total		$	7,972			$	7,430

Operating expenses increased $0.5 million, or 7.3%, from the first six months of fiscal year 2008 to the first six months of fiscal year 2009. Selling, Marketing and Warehouse expenses increased $0.4 million, or 9.1%, as a result of our strategic decision to invest in our sales and marketing infrastructure in order to drive future revenue growth. In doing so, we have added breadth and depth to our sales management team and further expanded our coverage of accounts nationally. Administrative expenses increased $0.1 million, or 4.8%, from the first six months of fiscal year 2008 to the first six months of fiscal year 2009.

Other Expense:

		Six Months Ended
		September 27,				September 29,
		2008				2007
Other Expense:
Interest Expense		$	27			$	63
Other Expense			12				290
Total		$	39			$	353

Interest expense decreased slightly from the first six months of fiscal year 2008 to the first six months of fiscal year 2009 as a result of our reduced debt prior to our acquisition of Westcon. Other expenses, consisting primarily of foreign currency net losses, decreased due to a reduction in our intercompany balances.

Taxes:

		Six Months Ended
		September 27,				September 29,
		2008				2007
Provision for Income Taxes		$	430			$	258