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Item 1. Business.
General
TESSCO Technologies Incorporated (TESSCO or the Company) is a leading provider of integrated product
plus supply chain solutions to the professionals that design, build, run, maintain and use wireless voice, data, messaging,
location tracking and Internet systems.
TESSCO is in The Vital Link® position between buyers and manufacturers. While creating Your Total
Source® opportunity for its customers to improve the way business is done, TESSCO presents, markets, sells and supports
manufacturers' products as a part of a total customer solution, thus providing a cost-effective channel to a broad and
diverse customer base.
TESSCO's operational platform, its Knowledge, Configuration, Delivery and Control (KCDC) System,
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.
TESSCO began its "total source" operations in 1982, was reincorporated as a Delaware corporation in
1987 and has been listed on the NASDAQ Stock Market (symbol: TESS) since 1994. Today, TESSCO operates 24 hours a day,
seven days a week, under ISO 9001:2000 registration. TESSCO's Global Logistics Center and Solutions Development Center
in Hunt Valley, Maryland and its fulfillment center in Reno, Nevada configure orders for complete, on-time delivery
throughout the world. In March 2002, TESSCO purchased a 115,000 square-foot facility in Reno, Nevada that should be
operational during the fall of 2002. This new facility will serve as the Americas Logistics Center and will extend
TESSCO's capabilities and presence and will also serve as an operational backup to the Global Logistics Center.
TESSCO's solution offering, consisting of over 34,000 items from over 400 manufacturers, falls within the broad
categories of network infrastructure, mobile devices and accessories and test and maintenance products.
TESSCO currently serves approximately 14,000 business customers and 46,000 consumers per quarter,
including a diversified mix of cellular, PCS and paging carriers, wireless ISP, fixed broadband and mobile dispatch
operators, infrastructure site owners, contractors and integrators, wireless dealers, value-added resellers,
retailers, self-maintained users and consumers.
Products and Services
TESSCO identifies, selects, presents, markets, sells and supports products and services required to design, build,
run, maintain and use a wireless system. The Company principally offers 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 over $50,000 and gross profit margins ranging from less than 5% to over 90%. During fiscal 2002, the
Company offered over 34,000 stock keeping units (SKUs), broadly classified as network infrastructure, mobile
devices and accessories and test and maintenance products, which accounted for approximately 43%, 32% and 25% of
revenues, respectively, during fiscal 2002. Network 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 network infrastructure service offering
includes connector installation, custom jumper assembly, filter product tuning, site kitting and logistics integration.
Mobile devices and accessory products include cellular telephones, pagers and two-way radios and related accessories
such as replacement batteries, cases, microphones, speakers, mobile amplifiers, power supplies, headsets, mounts,
car antennas and various wireless data devices. Retail merchandising displays and promotional programs and customized
order fulfillment services and affinity-marketing programs, such as providing outsourced call centers and private
label Internet sites, complement the Company's primary mobile devices and 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, primarily subscriber
accessory products and infrastructure accessory components, are developed and offered under a TESSCO-owned brand,
Wireless Solutions®.
TESSCO's products are sold as part of integrated product plus supply chain solutions. TESSCO's supply chain services
for all product areas are grouped under Knowledge, Configuration, Delivery and Control (KCDC™). Knowledge solutions
include product choice comparison, with comprehensive specifications organized by product, not manufacturer,
reinforced by engineering, sales and technical support staff and hands-on training programs. Configuration services
are comprised of site kitting, logistics management, consumer merchandizing and marketing and customized toolkits,
allowing the products to be delivered ready for immediate use, installation or resale. TESSCO's delivery system
allows the customer to select 1-, 3- or 5-day "just-in-time" delivery, to specific delivery locations. For every
order, TESSCO provides a single delivery with custom packaging designed to eliminate the customer's need for
staging and warehousing. TESSCO guarantees on-time, complete and error-free delivery. TESSCO 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, property and usage tracking and history reporting and alternative financing options.
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 of 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 March 31, 2002, 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 42% of TESSCO's
fiscal 2002 revenues were generated by the sale of products purchased from its top ten vendors, with products
purchased from its largest vendor generating approximately 13% of the Company's revenue) and although 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, dealers and resellers, consumers and
international users, which accounted for approximately 50%, 38%, 8% and 4%, respectively, of fiscal 2002 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. Dealers and 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 with 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 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 or resellers that conduct business outside
of the United States. TESSCO currently services customers in over 100 countries.
No one customer accounted for more than 5% of TESSCO's revenues during fiscal 2002. TESSCO's ten
largest customers accounted for approximately 22% of its revenues during fiscal 2002.
Method of Operation
TESSCO believes that it has 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 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
integrated product and supply chain 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 four primary markets: system
operators (i.e., carrier, tower, build-to-suit contractors, Internet service providers and self-maintained users);
resellers (i.e., dealers, value-added resellers and retail and mass merchants); consumer and fulfillment services
(i.e., affinity programs); and international users. 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 151,000 existing and
potential customers, including the names of key personnel, past contacts and inquiry and 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 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, 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 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 offering as new wireless communications products and technologies are developed.
In addition to determining the product offering, the Company's product and solutions development
teams provide the technical foundation for both customers and TESSCO 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 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, which are distributed
semi-annually to over 75,000 current and prospective buyers in over 110 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 TESSCO customers; TESSCO
Specialty Guides, which provide in-depth, customizable product knowledge on a specific category of product;
TESSCO Transmitter®, a biweekly customer newsletter and TESSCO.com®.
TESSCO.com®, the Company's Internet-based Knowledge, Configuration, Delivery and Control
Solution and Transaction System, features an online 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 34,000 SKUs from more than 400 manufacturers
of network infrastructure products, mobile devices and accessory products, as well as test equipment and
maintenance products;
- the ability to view invoices online and customer-specific pricing, based on
TESSCO's tiered pricing structure, which is tied to a customer's purchases;
- easy ordering capabilities, including a worksheet ordering tool which allows
for the construction of a total source order; worksheets can be saved with or without protection, copied
and shared;
- order confirmation, specifying the contents, order status, delivery date,
tracking number and total cost of an order;
- order history review; and
- pre-configured base solutions that can be customized to a particular customer's
needs.
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 March 31, 2002 and April 1, 2001, the Company had an immaterial level of backlog orders. All backlog orders
as of March 31, 2002 are expected to be filled within 90 days of fiscal year-end. For the fiscal years ended March
31, 2002 and April 1, 2001, inventory write-offs were 0.9% and 0.8% 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 offering 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 8,700 in fiscal 2001 to 8,900 in fiscal
2002. An average of 13,600 consumer end-users were served per month in fiscal 2002 as compared to 15,600 in
fiscal 2001.
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 product planning and procurement system, allows the Company to improve inventory
control, minimize multiple product shipments to complete an order and 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, thus reducing overhead associated with the distribution
functions. Orders are delivered to customers by a variety of freight line and parcel transportation carriers
with whom TESSCO contracts. 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 and external 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 2002, TESSCO continued its migration to Oracle database information
technology, thereby augmenting its existing system. 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, manufacturers and team members with enhanced knowledge delivery.
TESSCO hosts several websites for certain affinity partners. The underlying infrastructure
for these affinity websites is TESSCO.com®. In all cases, increased control capabilities, including partner
co-branding, independent landing pages and URLs, product filtering and purchase authorization dollar limits,
have been layered on to TESSCO.com® to allow TESSCO to seamlessly interact with the customer, fulfill online
orders and provide required information to 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-to-day operations, including failure of the Company's information technology system,
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 March 31, 2002, the Company had 528 full-time equivalent employees. Of the Company's full-time
equivalent employees, 269 were engaged in customer and vendor service, marketing, sales and product
management, 193 were engaged in fulfillment and distribution operations and 66 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 competitive and fragmented, and is
comprised of several national distributors, such as Hutton Communications, Cellstar, Brightpoint,
Sprint North Supply, Anixter, Westcon, Comstor, Tech Data, Ingram Micro and Wincomm, as well as
numerous regional 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. The Company believes, however, that its strength
in service, the breadth and depth of its product offering, its information technology system, 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 and
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 offering, its ability to quickly provide products and supply chain solutions 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, if 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®,"
"Transmitter®," "Wireless Solutions®," "TESSCO Technologies®," "TESSCO Service Solutions®," "National Airtime®,"
"The Vital Link®," "TESSCO Magic®," "Your Procurement Wizard®," "Wireless Rent®," "Tech Net®," "Techdirect®,"
"A Simple Way of Doing Business Better®" and "Power Tower®." 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, TESSCO intends, 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 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.
Item 2. Properties.
The Company's corporate headquarters and primary distribution center, known as the Global Logistics Center, is
located in a Company-owned 184,000 square-foot facility located north of Baltimore in Hunt Valley, Maryland.
Certain long-term debt is secured by the property, as described in Note 6 to the Consolidated Financial
Statements. As of April 1, 2001, the Company entered into a lease expiring March 2006 for an additional
65,000 square feet of space adjacent to the Global Logistics Center in Hunt Valley, Maryland, to house the
Company's Solutions Development Center. New product and service solutions are developed at the Solutions
Development Center. West coast sales and fulfillment are currently facilitated by a 15,000 square-foot
distribution center in Reno, Nevada, which is leased by the Company pursuant to a lease which expired
June 2001, but which has been extended on a month-to-month basis. On March 19, 2002, the Company acquired
a 115,000 square-foot distribution and office facility in Reno, Nevada. This facility will become
operational during fiscal 2003 and will be used to configure and fulfill product and supply chain
solutions, provide disaster backup for the Global Logistics Center and provide for future growth of
staffing and fulfillment.
Item 3. Legal Proceedings.
Lawsuits and claims are filed against the Company 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.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 4A. Executive Officers of the Registrant.
Executive officers are elected annually by the Board of Directors and serve at the discretion of the Board
of Directors. Information regarding the executive officers of the Company is as follows:
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NAME |
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AGE |
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POSITION |
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Robert B. Barnhill, Jr. |
58 |
Chairman, President and Chief Executive Officer Robert B. Barnhill, Jr.
is Chairman, President and Chief Executive Officer and founded the business in 1982. |
|
Robert C. Singer |
46 |
Senior Vice President and Chief Financial Officer Robert C. Singer
joined the Company in October 1999 as Senior Vice President and Chief Financial Officer. Previously, he was Vice
President and Chief Financial Officer of the Global Industrial Group of McCormick & Company, Inc. |
|
Richard A. Guipe |
52 |
Senior Vice President of Sales and Market Developments Richard A.
Guipe joined the Company in June 1996 and has served as Senior Vice President of Sales and Market Development
since January 2000. Prior to that date, Mr. Guipe served in several executive positions with the Company.
Prior to joining the Company, he served as a Vice President for the Heliax Products Division of Andrew Corporation. |
|
Douglas A. Rein |
42 |
Senior Vice President of Fulfillment and Operations Douglas A. Rein
joined the Company in July 1999 as Senior Vice President of Fulfillment and Operations. Previously, he was
Director of Operations for Compaq Computer Corporation and Vice President, Distribution and Logistics
Operations for Intelligent Electronics. |
|
Mary Lynn Schwartz |
46 |
Senior Vice President, Chief Administrative Officer and Corporate Secretary
Mary Lynn Schwartz rejoined the Company in November 1997 and has served as Senior Vice President, Chief Administrative
Officer and Corporate Secretary since January 2000. Prior to that date, Ms. Schwartz served in several executive
positions with the Company. Between 1992 and 1997, she owned and managed a local public accounting and management
consulting practice. She served as the Company's Chief Financial Officer from 1988 to 1992. |
|
Randolph S. Wilgis |
38 |
Senior Vice President of Solutions Development and Marketing Randolph S.
Wilgis joined the Company in June 1991 and has served as Senior Vice President of Solutions Development and Marketing
since April 2002. From January 2000 through March 2002, Mr. Wilgis served as Senior Vice President of New Business
Development. Prior to that date, Mr. Wilgis served in several executive positions with the Company. Prior to joining
the Company, he served as a project manager for The Whiting Turner Company. |
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