TESSCO TECHNOLOGIES

 

TESSCO TECHNOLOGIES 2002

 

Annual Report

TABLE OF CONTENTS:  




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Form 10-K - Part I

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:


NAME

 

AGE

 

POSITION

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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