PART I
ITEM 1: BUSINESS

General

  TESSCO Technologies Incorporated (TESSCO or the Company) is a leading provider of the services, products and solutions required to build, operate, maintain and use wireless voice, data, messaging, location tracking and Internet systems. The Company provides marketing and sales services, knowledge and supply chain management, product-solution delivery and control systems utilizing extensive Internet and information technology.

  TESSCO's guiding vision is to be The Vital Link^TM between buyers and manufacturers. For its customers, TESSCO provides a total source of product knowledge, choices and availability and the solutions that create an opportunity to improve the way business is done. For its manufacturers, TESSCO presents, markets and sells their products as a part of a total customer solution, thus providing a cost-effective channel to a broad and diverse customer base. The TESSCO mission is to virtually link the knowledge to make decisions and the delivery of configured product solutions to the point of use, while providing control of the supply chain process.

  All customer, manufacturer, product, configuration, sales and delivery activities are directed by an integrated enterprise information technology platform. This platform incorporates TESSCO's Wireless Product Knowledge System (WPKS), an integrated database containing specifications and configuration information for over 27,000 wireless communications products. TESSCO's WPKS allows presentation and comparison of product and solution choices and alternatives, organized by product, rather than manufacturer. Product presentations include all specifications, features, benefits, photographs and usage instructions. WPKS information is processed into knowledge for decision-making and is presented in print, electronically and on the Internet in the Solutions Guide, The Wireless Journal^® and TESSCO.com^®.

  TESSCO.com^®, the Internet-based Knowledge-Configuration-Delivery-Control (KCDC™) Solution and Transaction System, gives engineers, system designers, technicians and buyers tools to help them make better decisions; configure complete solutions; eliminate inventory; and achieve on-time, low-cost system operation. Buyers can quickly and easily (1) select and evaluate possible choices; (2) configure solutions and orders with worksheets; (3) confirm pricing and availability; (4) reserve and order products for delivery; and (5) control, support and track purchases and order history by accessing TESSCO.com^® or the sales and technical support center, 24 hours a day, 7 days a week.

  TESSCO's support operations are centralized at the Global Logistics Center, the Company's ISO 9002 registered headquarters in Hunt Valley, Maryland. Marketing campaigns and new product and service solutions are developed at the Solution Development Center, also located in Hunt Valley, Maryland. Fulfillment centers in Hunt Valley, Maryland and Reno, Nevada, configure orders for complete, on-time delivery throughout the world. The Company currently serves more than 8,500 business customers and 17,000 consumers per month, including a diversified mix of cellular, PCS and paging carriers, Wireless ISR fixed broadband and mobile dispatch operators, infrastructure site owners, contractors and integrators, wireless value-added resellers, retailers, plus consumers and subscribers.

Products and Services

  TESSCO identifies, selects, catalogs, markets and sells products and services required to build, operate, maintain and use a wireless system, as well as accessory products for wireless system subscribers. The Company principally offers competitively priced, manufacturer brand name products, ranging from simple hardware items to sophisticated spectrum analyzers, with prices ranging from less than $1 to over $50,000 and gross profit margins ranging from less than 5% to over 60%. During fiscal 2001, the Company offered over 27,000 stock keeping units (SKUs), broadly classified as base site infrastructure, subscriber accessory and test and maintenance supplies, which accounted for approximately 49%, 32% and 19% of revenues, respectively, during fiscal 2001. Base site infrastructure products are used to build, repair and upgrade wireless telecommunications, computing and Internet networks, and generally complement radio frequency transmitting and switching equipment provided directly by original equipment manufacturers (OEMs). Products include base station antennas, cable and transmission lines, fixed broadband equipment, filtering systems, small towers, lightning protection devices, connectors and miscellaneous hardware. The Company's base site infrastructure service offerings include connector installation, custom jumper assembly, filter product tuning, site "kitting" and "logistics integration." Subscriber accessory products are those products used with mobile and portable devices, such as cellular telephones, pagers and two-way radios. Products include replacement batteries, cases, microphones, speakers, mobile amplifiers, power supplies, headsets, mounts, car antennas and various wireless data devices. Customized order fulfillment services and affinity marketing programs, such as providing outsourced call centers and private label Internet sites, complement the Company's primary subscriber accessory product offering. 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, replacement and component parts and supplies required by service technicians.

  While TESSCO principally provides manufacturer brand name products, a variety of products, which are primarily subscriber accessory products, are developed and offered under its private labels, mainly "Wireless Solutions^®."

  As part of its commitment to customer service, the Company typically allows customers to return a product for any reason, for credit, within 30 days after the date of purchase. Total returns and credits have been less than 5% of revenues in each of the past three fiscal years.

  As of April 1, 2001, the Company was offering products purchased from over 400 manufacturers. Although a substantial portion of the Company's purchases are concentrated with a small number of vendors (approximately 31% of TESSCO's fiscal 2001 revenues were generated by the sale of products purchased from its top ten vendors, with products purchased from its largest vendor generating approximately 6% of Company revenue) and the Company does not maintain long-term supply contracts with its vendors, the Company believes that alternative sources of supply are available for many of the product types it carries.

Customers

  TESSCO's customer base consists of systems operators, resellers, consumers and international users which accounted for approximately 57%, 31%, 8% and 4%, respectively, of fiscal 2001 revenues. All of these customers, excluding consumers, share the characteristic that they are organizations that design, install, operate, repair or sell some type of wireless communications system. Systems operators are generally responsible for building and maintaining the infrastructure system and providing airtime service to individual subscribers. Also categorized as systems operators are self-maintained users who have significant internal communications requirements and, as a result, own and operate their own two-way radio networks and service their own equipment. Self-maintained users include commercial entities such as major utilities and transportation companies, federal agencies and state and local governments, including public safety organizations. Resellers sell, install and service cellular telephone, paging and two-way radio communications equipment primarily for the consumer and small business markets. TESSCO's customers in this classification include local and national proprietorships and retailers, as well as sales and installation centers operated by cellular and paging carriers. Consumers having cellular or PCS phones place orders for accessories via telephone and the Internet through TESSCO's affinity-marketing programs. Under these programs, the Company collaborates with its affinity-marketing clients, including OEMs, wireless carriers and dealers, to market to their customers under their brands. TESSCO typically acts as the merchant on behalf of the affinity-marketing client, interfacing with the customer, accepting the order, shipping from TESSCO's inventory and collecting payment. TESSCO's affinity-marketing programs create a high level of customer service and supplementary income for the client through revenue share payments. International users are generally systems operators that conduct business outside of the United States. TESSCO currently services customers in over 100 countries.

  No one customer accounted for more than 6% of TESSCO's revenues during fiscal 2001. TESSCO's ten largest customers accounted for approximately 25% of its revenues during fiscal 2001.

Method of Operation

  TESSCO believes that it has developed a highly integrated, technologically advanced and efficient method of operation based on these 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 TESSCO's knowledge tools, including the Solutions Guide, a one-of-a-kind industry resource and TESSCO.com^®, the Company's Internet-based Solution and Transaction System;
• responding to what TESSCO refers to as "the moments of truth" by providing customers with sales, service and technical support, 24 hours a day, seven days a week, 365 days a year;
• providing customers what they need, when and where they need it by delivering total source product and service solutions; and
• helping customers enhance their operations by providing real-time order tracking and performance measurement.

  TESSCO operates as a team of teams structured to enhance marketing innovation, customer focus and operational excellence and consists of these integrated units:

  Market Development and Sales: To meet the needs of a dynamic marketplace, sales and marketing activities are organized on an end-market basis. Sales teams are focused on three primary markets: system operators (i.e., carrier, tower, build-to-suit contractors, Internet service providers, self-maintained users and international users); resellers (i.e., dealers, value-added resellers and retail and mass merchants); and consumer and fulfillment services (i.e., affinity programs). This organization allows customized product offerings and value propositions to be developed for particular markets and the building of closer, long-term customer relationships.

  TESSCO attempts to understand and anticipate customers' needs and build solutions by cultivating lasting relationships. The Company's customer database contains detailed information on over 86,000 existing and potential customers, including the names of key personnel, past contacts and inquiry, buying and credit histories. This extensive customer database enables the Company to identify and target potential customers and to market specific products to these targeted customers. Potential customers are identified through their responses to direct-marketing materials, advertisements in trade journals and industry trade shows, as well as, through referrals from other TESSCO customers. Customer relationship representatives follow up on these customer inquiries through distribution of the Company's information materials, phone contact and field visits. The information technology system tracks a potential customer identification from the initial marketing effort through the establishment and development of a purchasing relationship. Once a customer relationship is established, the Company carefully analyzes purchasing patterns and identifies opportunities to encourage customers to make more frequent purchases of a broader array of products. TESSCO believes that it is able to develop efficient and effective marketing programs to expand its customer base and increase sales to its existing customers, while at the same time managing sales and marketing expenses. Scheduled calls are made to each regularly purchasing customer for the purpose of information dissemination, order generation, database maintenance and the overall enhancement of the business supply relationship.

  Solutions Development and Marketing: TESSCO actively monitors advances in technologies and industry trends, both through market research and continual customer interaction, and continues to add to its product offerings as new wireless communications products and technologies are developed.

  In addition to determining the product offering, the Company's product development teams provide the technical foundation for both customers and TESSCO personnel. The Wireless Product Knowledge System (WPKS) is continually updated to add technical information in response to vendor specification changes and customer inquiries. WPKS contains detailed information on each 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 TESSCO personnel for product development, procurement, technical support, cataloging and marketing.

  The Company utilizes its Wireless Product Knowledge System to develop both broad-based and customized product information materials. These materials are designed to encourage both existing and potential customers to view TESSCO as an important source of their product requirements by providing useful and timely product and service information. These knowledge tools include Solutions Guides distributed semi-annually to over 75,000 current and prospective buyers in over 120 countries; The Wireless Journal^®, which is designed to introduce the reader to TESSCO's capabilities and product offerings and contains information on significant industry trends and product reviews; Technical Application Notes and White Papers, which provide in-depth planning and installation instructions and diagrams; TESSCO T-Flash™, which features new products and monthly specials; Tech Tips, which offer suggestions and ideas from other TESSCO vendor partners; TESSCO Specialty Guides, which provide in-depth, customizable product knowledge on a specific category of product; and TESSCO.com^®.

  TESSCO.com^®, the Company's Internet-based Knowledge-Configuration-Delivery-Control (KCDC^TM) Solution and Transaction System, features an on-line version of the Company's printed Solutions Guide and a unique business-to-business transaction system, enabling customers to conduct product searches and to place customized orders for complete, on-time delivery. Its features include:

• an electronic version of the Company's printed Solutions Guide;
• in-depth product knowledge, including illustrations, detailed specifications and application information;
• order reservations;
• real-time product availability for over 27,000 SKUs from more than 400 manufacturers of base site infrastructure products, subscriber accessory products, as well as test equipment and maintenance products;
• customer-specific pricing, based on TESSCO's tiered pricing structure which is tied to a customer's purchases;
• easy ordering capabilities;
• order confirmation, specifying the contents, order status, delivery date, tracking number and total cost of an order; and
• detailed order history.

  TESSCO's knowledge tools not only empower its customers to make better decisions by delivering product knowledge, rather than just information, but also provide its manufacturers the opportunity to develop their brands and to promote their products to a broad and diverse customer base.

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

  The Company uses its information technology system to monitor and manage its 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 inventory levels. As of April 1, 2001 and March 26, 2000, the Company had an immaterial level of backlog orders, and in the case of those existing at April 1, 2001, all are expected to be filled within 90 days of fiscal year-end. For the fiscal years ended April 1, 2001 and March 26, 2000, inventory write-offs were 0.8% and 0.3% of total purchases, respectively. Generally, the Company has been able to return slow-moving inventory to its vendors pursuant to stock rotation agreements.

  Customer Support and Order Entry: The customer support teams are responsible for responding to what TESSCO refers to as "the moments of truth" by providing sales and customer support services by means of an effective and efficient transaction system. TESSCO also continually monitors its customer service performance through report cards included with each product delivery, customer surveys and regular interaction with customers. By combining its broad product offerings with a commitment to superior customer service, TESSCO seeks 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.

  The Company's information technology system provides detailed information on every customer account, including recent inquiries, buying and credit histories, separate buying locations within a customer 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.

  TESSCO believes that its commitment to providing prompt, friendly and efficient customer service before, during and after the sale enables it to maximize sales, customer satisfaction and retention. The average number of business customers per month has increased from 8,000 in fiscal 2000 to 8,700 in fiscal 2001. An average of 15,600 consumer end-users were served per month in fiscal 2001 as compared to 14,100 in fiscal 2000, as the Company has continued to expand its affinity-marketing programs.

  Fulfillment and Distribution: Orders are received at the Company's centralized customer support center. 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 materials handling system, which is integrated with the information technology system, utilizes bar coded labels that are applied to every product, allowing distribution center personnel to utilize radio-frequency scanners to locate products, fill orders and update inventory. The distribution system also allows the Company to improve inventory control, minimize multiple product shipments to complete an order, limit inventory duplication and reduce the overhead associated with its distribution functions. Orders can be delivered by a variety of freight lines and carriers as specified by the customer. Delivery charges are calculated on the basis of the weight of the products delivered, not distance to the customer. TESSCO believes that this approach, combined with its Performance and Delivery Guarantee, which emphasizes not merely prompt shipment, but on-time delivery, enables customers to minimize their inventories and reduce their overall procurement costs, thereby encouraging them to make TESSCO their total source supplier.

  Information Technology: Critical to the success of the Company's operations is its information technology system. TESSCO has made substantial investments in the development of this system, which integrates cataloging, marketing, sales, fulfillment, inventory control and purchasing, financial control and internal communications. The information technology system includes highly developed customer and product databases and is integrated with the Company's distribution centers. The information contained in the system, is available on a real-time basis to all TESSCO employees and is utilized in every area of the Company's operations.

  During fiscal 1999, TESSCO began migrating its system to Oracle database information technology, thereby augmenting its existing system. Throughout fiscal 2000 and 2001, TESSCO continued this migration. To date, the Company has completed implementation of several Oracle applications and continues its strategy to migrate certain additional feature sets, depending on the level of functionality and productivity enhancement, to Oracle database technology. In so doing, TESSCO believes it has achieved and will continue to achieve system scalability while providing its customers and manufacturers with enhanced knowledge delivery.

  TESSCO hosts several websites for certain affinity partners. By hosting these websites, TESSCO is able to seamlessly interact with the customer and fulfill on-line orders for these affinity partners. The Company has been successful to date in pursuing a highly integrated, technologically advanced and efficient method of operations; however, disruption to its day-today operations, including failure of the Company's information technology system or distribution system, or freight carrier interruption, could impair the ability of the Company to receive and process orders or to ship product in a timely and cost-efficient manner.

Employees

  As of April 1, 2001, the Company had 524 full-time equivalent employees. Of the Company's full-time equivalent employees, 274 were engaged in customer and vendor service, marketing and product management, 194 were engaged in fulfillment and distribution operations and 56 were engaged in administration and technology systems services. No employees are covered by collective bargaining agreements. The Company considers its employee relations to be excellent.

Competition

  The emerging wireless communications distribution industry is fragmented and is comprised of several national distributors, such as Hutton Communications, Cellstar, Brightpoint, Sprint North Supply, Anixter, Westcon, Comstor and Wincomm and numerous regional distributors. In addition, many manufacturers sell direct. Barriers to entry for distributors are relatively low, particularly in the subscriber accessory market, and the risk of new competitors entering the market is high. The Company believes, however, that its strength in service, the breadth and depth of its product offerings, its information technology system and its large customer base and purchasing relationships with more than 400 manufacturers provide it with a significant competitive advantage over new entrants to the market. Some of the Company's current competitors, particularly certain manufacturers, have substantially greater capital resources, sales and distribution capabilities than the Company. In response to competitive pressures from any of its current or future competitors, the Company may be required to lower selling prices in order to maintain or increase market share, and such measures could adversely affect the Company's operating results.

  Continuing changes in the wireless communications industry, including risks associated with conflicting technology, changes in technology and inventory obsolescence, could adversely affect future operating results. In addition, the Company views the rapid expansion of Internet technology as a positive business opportunity; however, this technology and evolving Internet business models could also present additional competitive pressures and challenges to the Company.

  The Company believes 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. The Company believes that it competes favorably with respect to each of these factors. In particular, the Company believes it differentiates itself from its competitors based on the breadth of its product offerings, its ability to quickly provide products in response to customer demand and technological advances, the level of its customer service and the reliability of its order fulfillment process.

Intellectual Property

  TESSCO seeks to protect its intellectual property through a combination of trademarks, service marks, confidentiality agreements, trade secret protection and, when appropriate, patent protection. Thus far, TESSCO has generally sought to protect its intellectual property, including its product data and information, customer information and information technology systems, through trademark filings and non-disclosure, confidentiality and trade secret agreements. The Company typically requires its employees, consultants and others having access to its technology to sign confidentiality and non-disclosure agreements. There can be no assurance that these confidentiality and non-disclosure 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 the Company relies.

  The Company maintains a number of trade names and registered trademarks in connection with its business activities, including "TESSCO^®," "TESSCO.com^®," "Your Total Source^®," "The Wireless Journal^®," "Wireless Solutions^®," "TESSCO Technologies^®," "TESSCO Service Solutions™," "National Airtime^®," "The Vital Link for the Wireless Communications Industry^®," "TESSCO Magic^®," "Your Procurement Wizard^®," "WirelessRent^®," "TechNet^®," "TESSCO.. .Striving to be the Best^®," "TechDirect^®," "A Simple Way of Doing Business Better^®" and "PowerTower^®." The Company's general policy is to file for trademark and service mark protection for each of its trademarks and trade names and to enforce its rights against any infringement.

  Although TESSCO currently holds no patents, the Company has filed two patent applications which are currently pending before the United States Patent and Trademark Office. TESSCO intends, when appropriate, to continue 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 TESSCO's business, and as a result, the Company's business may be adversely affected. In response to patents of others, the Company may need to license the right to use technology patented by others, or in the event that a license cannot be obtained, to design its systems around the patents of others.