UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period N/A
Commission file number 0-10877
TCI INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3026925
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
222 Caspian Drive, Sunnyvale, CA 94089
(408) 747-6100
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on Title of each class which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
Indicate by check mark whether the registrant (l) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days:
YES NO
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K [X]
As of December 15, 1998, the aggregate market value of voting stock
held by non-affiliates was $7,027,232.
As of December 15, 1998, the number of shares of common stock
outstanding was 3,211,715.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the Annual Meeting of
Stockholders to be held on February 9, 1999 are incorporated by
reference into Part III hereof.
PART I
ITEM 1. Business
General
Except for historical information contained herein, the matters
discussed in this report contain forward-looking statements that
involve risks and uncertainties that could cause results to differ
materially.
TCI International, Inc. (the Company) is a holding company which has
three operating subsidiaries, Technology for Communications
International ("TCI"), a company incorporated in California on March
13, 1968; BR Communications ("BR"), a company incorporated in
California on January 24, 1966, and; TCI Wireless, Inc. ("TCIW") a
company incorporated in California on April 28, 1995. The operating
subsidiaries share resources, including facilities, management and
labor. Unless the context indicates otherwise, the terms "Company,"
"TCI," "BR", and "TCIW" shall include their consolidated subsidiaries.
Products
The Company manufactures specialized radio transmission, receiving,
and test equipment and offers these items for sale as separate
products or as part of larger systems comprised of various components.
The Company's equipment serves frequency ranges of 0.5 to 3000 MHz and
falls into three core product lines: Broadcasting Products, Signal
Processing Products, and Test and Measurement Products. The Company's
products historically have been sold primarily to U.S. and foreign
government agencies, and to a lesser extent, commercial broadcast
entities.
Broadcasting Products
The Company designs and manufactures antenna systems and accessory
items that cover the frequency range of 0.5 to 870 MHz. Most of the
Company's products are used for AM, FM, or TV broadcasting, although
lower-power versions of its products in the 2 to 30 MHz range are used
for high frequency (HF) communications by military and commercial
organizations. The Company applies its proprietary electromagnetic and
structural software to produce antenna systems with optimal gain,
bandwidth, and power handling capability. In addition, many of the
Company's products must be installed and then integrated with other
parts of a system. The Company has successfully completed numerous
installation and integration projects in both domestic and foreign
locations. The Company has a unique combination of engineering,
manufacturing, installation, integration, and project management
skills that can be used to its competitive advantage in many bidding
situations.
HF communication antennas are usually employed in civil and military
shore-ship and land-air communications systems. HF communication has
recently been applied to create inexpensive systems that track trucks
over huge geographic areas without requiring access to cellular
telephone or satellite communications networks. The Company's HF
antennas will be used as the backbone of a major system soon to be
launched in the United States and other countries. HF communications
antennas typically sell in the $15,000 to $100,000 range, with large
systems of such antennas often selling for $1 to $3 million.
The Company's medium frequency (MF) (0.5 to 1.7 MHz) or HF (2 to 30
MHz) broadcasting antenna systems are typically large structures
consisting of towers up to several hundred feet high combined with
complex arrangements of wire cables. Antennas of this type operate at
high power levels ranging from 1 kW up to 8000 kW. The Company also
manufactures RF switches, transmission lines, and impedance
transformers that are used in conjunction with its antennas.
MF broadcasting antennas are sold either directly to broadcasters or
to transmitter manufacturers for integration into complete systems.
TCI also supplies complete MF broadcasting systems including TCI
antennas and transmitter and audio equipment manufactured by others
and integrated by the Company. MF broadcasting is used to transmit
amplitude-modulated (AM) signals primarily to car and portable radios.
Typical system orders range in price between $100,000 and $6,000,000.
Although the market for MF antenna systems has been stagnant in the
U.S., there remains a strong demand for such systems overseas,
particularly those systems that operate at high power. With the advent
of digital AM broadcasting in the next century, the market for the
Company's MF products both in domestic and foreign markets should
increase.
HF broadcasting, commonly known as short wave broadcasting, has been
the preferred medium for governments wanting to broadcast news and
propaganda to foreign audiences. HF broadcasting remains a relatively
inexpensive means of transmitting signals over very long distances at
much lower costs than those required for establishing a satellite-
based broadcasting system. Principal customers for the Company's HF
antenna products have been the U.S. International Broadcasting Bureau
(Voice of America, Radio Free Europe/Radio Liberty, and Radio Free
Asia), the British Broadcasting Corporation's World Service, other
foreign broadcasting services, and religious broadcasting
organizations. While the growth in HF broadcasting that was fueled by
the Cold War has decelerated, there remain a core group of
international broadcasters who continue to purchase the Company's HF
broadcasting equipment, although on a smaller scale than in years
past. Typical system orders range in price between $750,000 and
$10,000,000.
FM and TV broadcasting present exciting opportunities for the Company
in both the domestic and foreign markets. Within the United States,
the transition to digital television (DTV), mandated by the Federal
Communications Commission in April 1997, will require all of the
approximately 1600 domestic TV stations to install digital
transmission facilities within the next three to eight years. This
represents a huge potential market for the Company's antenna,
combiner, and transmission line products, particularly over the next
several years as the pace of the DTV conversion process accelerates.
The Company also expects to benefit from its invention of a new
combining system that allows a single antenna to serve multiple
transmitters in situations where conventional combiners are not as
cost effective. This new invention will simplify the conversion
process required to change over to digital broadcasting.
The overseas markets also present significant opportunities for sales
of FM and TV antennas and systems in countries that are privatizing
their broadcasting sectors and/or introducing digital television.
Unlike the United States, most countries have lacked a private
broadcasting sector. Broadcasting has been a monopoly of governmental
or government-owned organizations. This situation is changing rapidly
with the worldwide trend to privatize national telecommunications
organizations. In numerous countries, private entrepreneurs are
obtaining licenses to establish broadcasting stations that operate for
profit. This is a potentially large market for the Company's products
and systems engineering expertise. These projects are usually much
larger in scope and dollar value than the sale of individual antenna
systems. Typical sale prices of individual FM and TV antennas range
between $10,000 to $250,000, with turnkey systems ranging between
$100,000 and $500,000.
Signal Processing Products
The Company's signal processing products are comprised of direction
finding, signal collection, and specialized communications equipment
that are sold primarily to domestic and foreign military and
intelligence markets. The Company's core products consist of receivers
and transmitters, DSP-based direction finding processors, and
specialized application software. The Company manufactures products
that cover the frequency range from 0.5 to 3000 MHz.
The Company's direction finding (DF) and signal collection products
are used to identify, locate, classify, and analyze radio
transmissions using proprietary hardware and software for DF and
communication intelligence (COMINT) applications. The DF and
collection processes are performed rapidly, automatically, and without
detection by the subject. The classification and analysis functions
identify the modulation, frequency, and characteristics of the
signals. The Company's DF and signal collection software performs
these tasks automatically, thereby eliminating the need for the large
numbers of operators that have been needed to run older systems. The
Company's products can also be operated and monitored remotely,
eliminating the need for operators to be located at the same site as
the DF and signal processing equipment. The Company's signal
processing systems can also integrate the output from other
intelligence-gathering sources. In military applications, the
integrated data provide system users with information they can use to
estimate the disposition and intentions of potential adversaries.
The Company has recently introduced a revolutionary, full-featured
digital VHF/UHF DF and COMINT hardware platform suitable for DF and
specialized communications intelligence applications. The system
architecture uses a high speed analog-to-digital sampling technique to
provide a high performance DF capability from 10 kHz to 3000 MHz. The
unit is compact and has been packaged for portability. This product is
especially useful for national security or intelligence customers
interested in monitoring wireless communications within their own
borders. The large instantaneous bandwidth of the system makes it
ideal for monitoring signals with special modulations types, such as
those used in GSM and CDMA cellular telephone systems.
The Company manufactures all the major components of a typical DF and
signal processing system, including the antennas, receivers, DF
processors, RF switches and applications software. Specialized
portions of the systems, such as computers, cables, and specialized
integration equipment are purchased from others.
The sale prices of complete DF and signal processing systems range
from approximately $100,000 to $15,000,000. Certain components of a
system are often sold separately to special customers and are priced
at considerably lower amounts.
The signal processing product includes specialized equipment to
measure the characteristics of the ionosphere using the Company's
proprietary Chirpsounderr technology. This equipment is used as part
of communications, radar, and DF systems that operate in the 2 to 30
MHz frequency range in which the ionosphere has a major effect on the
propagation characteristics of the signals. Since the ionosphere's
characteristics change constantly, the Company's products provide the
necessary real-time data to optimize the performance of HF systems.
The price of a minimum system is $25,000, however the price of a
typical system is considerably higher.
Test and Measurement Products
The Company's test and measurement products consist of commercial
variants of its DF and signal processing products. These products
comprise specialized application and database software and proprietary
monitoring, measurement and DF hardware that operate from 10 kHz to 3
GHz. The products fall into two broad categories. The first category
comprises spectrum management systems ("SMS") that are used by foreign
governmental agencies tasked with monitoring and regulating the RF
spectrum within their country's borders. The second category comprises
automatic test equipment and systems that utilize the powerful
measurement technologies and software developed by the Company for use
in its spectrum management systems.
Spectrum management systems are required by all countries in order to
manage their electromagnetic spectrum. The growth in this market has
been fueled by the rapid expansion in the number of users of cellular
telephones, pagers, and other personal communications devices, and
sale of portions of the spectrum to commercial telecommunications
organizations. Most of the requirements for spectrum management
systems are driven by the worldwide trend towards privatization of
telecommunications services. Since the privatized spectrum has
usually been purchased at great expense and is expected to generate
revenues, the private telecommunications companies expect their
spectrum to be protected from interference and unlicensed usage. The
Company's spectrum management systems give regulatory authorities the
tools to maintain sufficient order and discipline in the spectrum so
that modern radio and wireless services can function. In addition,
spectrum management systems are used to a) issue frequency
assignments, b) administer the issuing of licenses and collection of
fines from users who violate the regulations, c) manage the databases
of users, licenses, and violations, d) monitor the spectrum, including
identifying, measuring, and locating signals, and e) prepare reports.
Traditionally, these functions have been performed manually using
stand-alone receivers, measurement equipment, and numerous forms
filled out by hand. The Company provides turn-key systems that perform
all tasks in an automated, integrated, seamless operation with a
minimum of operator intervention. These systems use Company products
and other commercial off-the-shelf equipment that the Company
integrates. The Company's systems are based on modular architecture
that allow special systems to be constructed from a common set of
building blocks.
Spectrum management systems can vary in complexity from a single site,
single position station to a large scale multi-site network including
2 to 15 fixed sites plus a complementary set of mobile measurement
vans. Typical systems range in price from $300,000 to $12,000,000.
Automated test equipment products provide a new marketing opportunity
for the Company. These products use the Company's proprietary high-
performance receivers and DSP-based processors that have been
developed for its spectrum management systems, and adds specialized
software to provide systems that simplify and automate the measurement
of complex signals. This market is not served by traditional
manufacturers of test equipment who focus only on standardized
equipment that can be sold in large quantities. Typical customers for
the Company's systems include wireless service providers as well as
manufacturers of specialized radio equipment and communications
satellites, all of whom must measure and analyze signals having
extremely complex modulations and structures. The Company's
measurement products are highly flexible. They can measure any type of
complex signal used in existing communications systems and can be
readily modified to measure even more complex signals that are
envisioned for future communications systems.
Marketing
The Company markets its equipment and systems to governmental and
commercial organizations both in the United States and foreign
countries primarily using its direct marketing force. For foreign
sales, the Company is often assisted by its local representatives who
are paid a commission on each sale. Foreign sales of some antennas
having specialized military applications and certain Signal Processing
and Test and Measurements products must have the approval of the
United States Department of State which limits the sales of such
products to foreign nationals. Such sales are subject to changes in
United States policy concerning the export of military technology.
Historically, more than 90% of the Company's foreign sales have been
denominated in United States dollars. The value of United States
dollar relative to foreign currencies affects the competitive position
of the Company's products overseas.
See Note 6 of the Notes to Consolidated Financial Statements for
information concerning revenue attributable to export sales and
individual customers.
Manufacturing
Broadcasting Products
Broadcast antenna systems are generally manufactured to order from
standard parts. MF and HF antennas are made from cable, fittings,
insulators, and fasteners. In the manufacturing process, fittings are
attached to antenna wires by machinery that also measures, forms, and
cuts the wires to close tolerances. FM and TV antennas do not use wire
members and are fabricated from machined or extruded metal parts.
Antennas are packaged in pre-assembled kits, reducing installation
time and cost, and increasing reliability.
Signal Processing Products
Signal processing products are assembled from standard computers,
radio frequency switches, receivers, and specialized instruments
manufactured to the Company's specifications either by the Company or
by specialized vendors. After the proprietary software is
incorporated into the system, it is tested in a simulated operating
environment.
The Company's receivers, DF processors, and HF ionospheric sounders
are generally assembled from standard components and other items
produced to the Company's specifications, such as printed circuit
boards, fabricated metal parts and crystal filters. Many of the
products contain microprocessors for which proprietary software is
designed and tested by the Company's engineers and technicians.
Certain custom communications systems involve the integration of other
manufacturers' equipment with products produced by the Company.
Test and Measurement Products
Test and measurement products are assembled using readily available
computer equipment and specialized signal measurement equipment,
provided either by the Company or by qualified subcontractors,
combined with specialized equipment provided by the Company. To a
significant extent, the heart of such systems lies in the proprietary
software that is incorporated into the system. These systems are
thoroughly tested in a simulated operating environment prior to final
delivery.
The Company is dependent upon the ability of its suppliers and
subcontractors to meet performance specifications, quality standards,
and delivery schedules in order to fulfill commitments to its
customers. While the Company endeavors to assure the availability of
multiple sources of supply, in certain cases involving complex
equipment it must rely on a sole source. The failure of certain
suppliers or subcontractors to meet the Company's needs may adversely
affect the Company. While the Company has from time to time
experienced delays in obtaining raw materials and components, to date
these delays have not materially affected its business.
Although many of the Company's products are installed by its
customers, the Company offers installation services including turn-key
project management.
United States Government Contracts and Regulations
Sales to the U.S. Government under prime and subcontracts accounted
for 31%, 31%, and 42% of the Company's revenue in fiscal years 1998,
1997, and 1996, respectively. The Company's U.S. Government business
is performed under cost-reimbursement-type contracts (cost-plus-fixed-
fee, cost-plus-incentive-fee, and cost-plus-award-fee) and under
fixed-price-type contracts (firm fixed-price and fixed-price
incentive). During fiscal 1998, 31% of the Company's total revenue
came from U.S. Government fixed-priced-type contracts, and none from
U.S. Government cost-reimbursement-type contracts, compared to 30% and
1%, respectively, in fiscal 1997 and 40% and 2%, respectively, in
fiscal 1996.
Under U.S. Government regulations, certain costs, including certain
financing costs and marketing expenses, are not reimbursable. The
U.S. Government also regulates the methods under which costs are
allocated to U.S. Government contracts. Additionally, costs incurred
under U.S. Government contracts are subject to audit. Management
believes the results of such audits, if any, will not have a material
effect on the Company's financial results.
Contracts with the United States Information Agency ("USIA") combined
with subcontracts to companies with prime contracts to the USIA
accounted for 7% of total revenue in fiscal 1998, 13% in fiscal 1997
and 23% in fiscal 1996.
U.S. Government contracts are, by their terms, subject to termination
by the U.S. Government either for convenience or for default of the
contractor. The continuation of long-term U.S. Government contracts
may be dependent upon the continuing availability of Congressional
appropriations. Due to the size of the Company's contracts with the
USIA and other agencies, a U.S. Government contract termination may
have a material negative affect on the operating results of the
Company. See further discussion in Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Company believes that the United States intelligence community is
adjusting its focus from the ex-Soviet Union to a much wider and
diverse population of threats. Because of this shift in focus from
Cold War driven planning, the Company expects that large, long
duration U.S. Government programs in defense intelligence and
broadcasting will not return and that revenue from such contracts will
generally decrease as a percentage of total revenue in future periods.
See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Competition and Risk
The Company encounters intensive competition in the sale of its
products from numerous other companies. Accordingly, substantial
efforts must be undertaken continually and on a long-term basis in
order to maintain existing levels of business. All of the Company's
major competitors have substantially greater financial and marketing
resources than the Company.
The world political environment has seen dramatic changes within the
last several years and as a result U.S. Government procurements for
the Company's broadcasting and signal processing products have
decreased substantially. As a result, the Company is focusing more on
overseas and commercial opportunities, as are the Company's
competitors.
Broadcasting Products
The principal competitive factors in the broadcast and communications
markets are reliability, performance, price, and breadth of product
line. The Company's principal competitors in the ground-based, high
frequency (HF) communications antenna market are Andrew Corporation,
Antenna Products Corporation, CSA and Creative Design Corporation. In
the market for HF (short-wave) and medium wave (MF) broadcast
antennas, the principal competitors are divisions of larger companies,
including Thomcast and Continental Electronics, both of which also
manufacture broadcasting transmitters. The size, international
reputation, and vertically integrated operations of these companies
give them an advantage over the Company, particularly in bidding on
entirely new stations in Third World countries. For FM and/or TV
antenna systems the Company's competitors are Andrew Corporation,
Dielectric Communications, ERI, Harris Corporation, Kathrein/SIRA,
RFS, Rymsa, and Shively Laboratories. These are all well-established
companies with broad product lines.
Signal Processing Products
Competitors in signal processing products include AEG Telefunken,
Andrew Corporation, CODEM Systems, Inc., E-Systems, Harris
Corporation, Racal Communications, Rockwell International Corp., Rohde
and Schwarz, Siemens Plessey & Co. Ltd., Southwest Research Institute
(SWRI), Thomson-CSF, Tadiran, and TRW. The principal competitive
factors are the performance of the equipment and price. In military
programs for signal collection and processing systems, the selection
of a particular supplier's products frequently limits further
competition by other vendors during the program's life cycle.
Test and Measurement Products
The Company's principal competitors for spectrum management systems
are Rohde and Schwarz, Tadiran, and Thomson-CSF. Since the
competitors' products are often less expensive, the Company must
convince its customers that its equipment has sufficient performance
advantages. Similar to the Company's position in supplying signal
processing systems, best value expressed as a function of performance
and price are the competitive determinants in most markets.
Additionally, since many of these systems are marketed in less
developed countries, the ability to offer attractive financing
alternatives also weighs strongly in the customer's decision making
process. The Company will continue to rely on the availability of
external sources of capital to meet its requirement to offer financing
on these international procurements.
For further information on risks, see Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
Backlog
See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Research and Development
See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Patents
The Company believes that its success does not depend on the ownership
of patents or trademarks but rather on its proprietary software,
innovative skills, technical competence, marketing abilities, and
responsiveness to customer needs.
Employees
As of September 30, 1998, the Company had 130 full-time employees.
None of the employees are represented by a labor union, and the
Company considers its employee relations to be good. The Company's
success is dependent on its ability to retain highly-skilled
personnel.
<TABLE>
ITEM 2 - Properties
Floor Area (sq. ft.) Lease
Company Expiration
Leased Date
<S> <C> <C>
Sunnyvale, CA 95,000 2000
</TABLE>
In addition, the Company leases office space in Redhill, Surrey,
United Kingdom (U.K.). The Company believes that its office space for
its corporate headquarters is suitable and adequate and will meet its
needs for the foreseeable future.
ITEM 3 - Legal Proceedings
On December 14, 1994, the California Regional Water Quality Control
Board for the San Francisco Bay Region adopted an order naming the
Company as a potentially responsible party (PRP), along with several
other parties, for ground water contamination in the vicinity of a
property the Company formerly occupied as a tenant in Mountain View,
California. The Company contends that it is not responsible for any
such contamination. In a related development in early 1995, the
Regional Water Board ordered the owner of the property to conduct a
program of soil sampling to determine if the site is currently a
source of ground water contamination. The results of this sampling
program were reviewed by and summarized in a letter from the Regional
Water Board dated October 11, 1995 in which it concluded that the
current levels of contamination do not indicate the site is a source
of ground water contamination presently, and as a result no further
investigative or remedial action is necessary. However, in its
correspondence the Regional Water Board refused to rule out the
possibility that the site was a source of contamination in the past
and as such it has left the matter to be resolved through binding
arbitration. In April, 1997, pursuant to their rights as the largest
PRP, Teledyne, Spectra Physics and Montwood submitted a petition to
convene a hazardous substance cleanup arbitration panel (HASCAP) with
an ultimate goal of determining and apportioning liability for the
cleanup costs amongst all of the PRPs associated with the site. The
Company and the other respondents objected to the convening of an
arbitration panel. On September 24, 1998, the Office of Environmental
Health Hazard Assessment ("OEHHA") advised the parties that the
legislative authority for the arbitration panels had "sunsetted" and
thus OEHHA would take no further action towards ruling on the
respondents' objections or convening a HSCAP arbitration panel unless
the legislature took action to reinstate the legislative authority for
these panels. Should the legislative authority for the HSCAP
arbitration panels be reinstated and should OEHHA overrule the
Company's and the other respondents' objections to the convening of
the panel, the Company may take legal action to dispute the panel's
jurisdiction and in all events will vigorously maintain that it is not
responsible for any of the groundwater extraction system being
operated by Teledyne/Spectra-Physics. At present, there is no
lawsuit, arbitration or other legal or administrative proceeding
pending against the Company regarding this Teledyne/Spectra Physics
matter, and it is possible that no further legal proceedings regarding
this matter and involving the Company will occur.
During 1990, the Company received a notice from an overseas customer
stating that the Company had not fulfilled certain requirements of a
$6,000,000 contract. No legal proceedings have been initiated on this
claim. The Company believes, based upon a review of the customer's
claim and consultation with legal counsel, that the liability, if any,
relating to this claim would not have a material adverse effect on its
results of operations or its financial position.
The Company is from time to time involved in routine litigation or
threatened litigation arising from the ordinary course of its
business. Such matters, if decided adversely to the Company, would
not, in the opinion of management, have a material adverse effect on
the financial condition of the Company.
ITEM 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth fiscal quarter
of 1998.
PART II
ITEM 5 - Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's common stock is traded over-the-counter on the National
Market System and quoted on the National Association of Securities
Dealers Automated Quotation System (NASDAQ Symbol TCII). The
following table sets forth the high and low closing sales price as
reported on the Over-the-Counter National Market System. These prices
do not include retail markups, markdowns or commissions.
<TABLE>
Fiscal 1998 Fiscal 1997
<S> <C> <C> <C> <C>
Quarter Ended High Low High Low
December 31 $6.63 $4.75 $7.63 $6.38
March 31 5.63 4.38 7.25 6.25
June 30 5.38 4.38 7.13 5.88
September 30 4.94 2.81 6.88 4.97
</TABLE>
As of September 30, 1998, there were 540 stockholders of record. The
Company has not paid any cash dividends on its common stock since
inception, and the Company presently intends to reinvest any earnings
into the business.
ITEM 6 - Selected Financial Data
The following table summarizes certain selected consolidated financial
data and is qualified in its entirety by the more detailed
Consolidated Financial Statements included elsewhere herein.
<TABLE> Data for the Five Years Ended September 30,
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
Statement of Operations Data:
Revenue $25,226 $34,101 $32,695 $29,354 $25,562
Operating costs and expenses:
Cost of revenue 18,172 28,650 21,856 18,672 15,798
Marketing, general and
administrative
11,472 11,857 10,941 10,348 9,555
Income (loss) from operations
(4,418) (6,406) (102) 334 209
Investment income, net 757 1,079 1,602 1,072 691
Income (loss) before provision
(credit)for income taxes (3,661) (5,327) 1,500 1,406 900
Income (loss) before change
in accounting for income taxes 81 (5,582) 1,056 1,311 756
Change in accounting for income taxes
(SFAS 109) - - - - 1,511
Net income (loss) (3,742) (5,582) 1,056 1,311 2,267
Basic earnings per share:
Net income (loss) per share (1.17) (1.75) .33 .41 .68
Shares used in per share
Computations 3,207 3,194 3,158 3,161 3,335
Diluted earnings per share:
Net income (loss) per share (1.17) (1.75) .31 .39 .67
Shares used in per share
Computations 3,207 3,194 3,366 3,392 3,371
Balance Sheet Data:
Working capital $15,046 $18,500 $22,246 $23,172 $22,098
Total assets 25,231 29,866 39,192 32,373 33,241
Stockholders' equity 16,833 20,549 26,014 24,855 24,072
</TABLE>
Quarterly Financial Data for the Two Years Ended September 30, 1998
Since revenue is generally recognized on a percentage of completion
basis, which is based upon total direct and indirect costs incurred,
there may be fluctuations in the Company's quarterly results. These
fluctuations can result from uneven flow of incoming material and
revisions to cost estimates on long-term contracts.
<TABLE>
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Fourth Third Second First
Quarter Quarter Quarter Quarter
Fiscal 1998
Revenue $4,328 $5,814 $8,187 6,897
Gross profit (106) 2,018 2,705 2,437
Net income (loss) (3,129) (702) 16 73
Net income (loss) per share (0.97) (0.22) - .02
Fiscal 1997
Revenue $8,139 $5,822 $9,472 $10,668
Gross profit (437) (2,935) 2,837 3,603
Net income (loss) (905) (5,137) 84 377
Net income (loss) per share (.28) (1.61) .02 .11
</TABLE>
ITEM 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Except for the historical financial information contained herein, the
following discussion and analysis may contain "forward-looking"
statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Such statements include declarations regarding the
intent, belief or current expectations of the Company and its
management. Prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance
and involve a number of risks and uncertainties; actual results could
differ materially from those indicated by such forward-looking
statements.
Overview
From its founding, the Company's focus has been large, long duration
U.S. government programs in defense intelligence, ultra-reliable HF
communications systems and high power broadcasting systems. To meet
the demands of a changing world market brought about by the end of the
Cold War, the Company has sought to diversify its product offerings in
the 1990s. As a result, its primary focus has changed from military
to more commercial applications with a customer mix dominated by
international entities and domestic non-governmental broadcasting
organizations. Today, the Company has three core product lines, the
Broadcast and Communications Division ("BCD"), the Signal Processing
Division ("SPD"), and the Test and Measurement Division ("TMD").
BCD offers antenna systems for medium wave broadcasting and broad band
antenna solutions for HF broadcasting and communications systems.
Recently, the Company has introduced proprietary antenna and
transmission feeder solutions for the FM and TV broadcast markets.
SPD sells direction finding, signal collection, and specialized
communication receiver and transmitter equipment into military and
intelligence markets. The Company's core products consist of
receivers and transmitters, DSP-based direction finding processors,
and specialized application software that routinely operate from 10kHz
to 3.0 GHz in frequency. TMD was created in 1995 to introduce
commercial variants of the company's direction finding technology into
the ITU spectrum monitoring market. Its product offerings consist of
specialized application and database software and proprietary
monitoring, measurement, and direction finding hardware that operates
from 10kHz to 3GHz. These systems are used by national regulatory
agencies in foreign countries similar in function to the Federal
Communications Commission ("FCC") to maintain order and discipline in
the radio spectrum.
Management believes that each of the three product lines offers core
technology in stable marketplaces that is of significant value.
However, in order to achieve substantial growth in revenues and
profits, the Company must continue to find ways to diversify and
leverage its technology and intellectual capital into adjacent,
growing markets.
In this regard, the Company, teamed with Hewlett Packard, achieved its
first diversification successes in fiscal 1995 and 1996 as it won
contracts to supply radio spectrum monitoring and surveillance ("SMS")
equipment to foreign customers. In March 1997, in an effort to
increase both its market share and its gross profit, TMD committed
itself to replace the equipment previously supplied by Hewlett Packard
with an all-DSP based solution of proprietary origin and design.
During fiscal 1998, TMD won its first two contracts for the supply of
this new generation equipment. As a result of the Company's
expenditure on SMS research and development efforts, it has developed
a full-featured UHF/VHF direction finding and COMINT hardware platform
suitable for direction finding and specialized communications
intelligence opportunities of interest to friendly military and
intelligence customers. The availability of these new products will
allow SPD to pursue a select group of UHF/VHF opportunities with
domestic and overseas military and intelligence customers. Currently,
no additional development funds are planned to further develop the
hardware platform. The Company expects, however, that additional
development will be required to add software features necessary to
prosecute certain types of digital modulation formats inherent in
today's digital communication systems. In order to more quickly
realize its financial objectives, the Company is pursuing
relationships with potential strategic partners who offer
complimentary features, such as software capabilities or an
established presence in markets not currently served by the Company.
The same research and development efforts have afforded the Company
the opportunity to leverage the combination of its DSP based products
and software with its specialized receiver and down converter products
into a large specialized automated test and measurement (ATE)
equipment market. The Company plans to partner with at least one
significant vendor in this market to jointly offer custom products and
solutions. Management believes that the Company has application
software skills and experience with RF component integration that is
unique and is of substantial value to these specialized ATE markets.
Current efforts are focused on establishing an effective distribution
channel.
The Company's BCD is expanding into offering the supply of digital TV
and FM broadcasting equipment. The Company has designed and has begun
selling a line of FM antennas in both domestic and international
markets. In addition, management believes the FCC mandated switch
from analog TV frequency assignments to digital assignments will
create a substantial requirement for new antenna, feeder and
transmission systems in the U.S. market between now and the year 2006.
Consequently, BCD's focus will be on developing products for this
market that offer proprietary solutions to the adjacent channel
assignment problem and providing engineering services to deal with
installations of new antennas on existing tower structures. The
Company believes that with the right strategic partners it can win a
significant share of business in this market. This opportunity will
require investment in development during each of the next three years.
While the transmission formats are different, there exists an overseas
market for similar digital TV technology. Efforts are currently
underway to explore these markets more fully in Australia and Europe.
During the last three years the Company has expended approximately
$6,000,000 on internal research and ("IR&D") efforts related to its
product and market diversification efforts. All costs for such
product development are presently funded internally and are expensed
as incurred. The Company expects that the future costs of these and
other efforts, including potential acquisitions, may be significant
enough to generate a loss from operations in fiscal 1999. The
investment of financial and human resources will continue in each of
these commercial efforts until either successful product introduction
is achieved or it is determined that a viable market does not exist
for these products.
In addition to IR&D, a significant portion of engineering effort is
customer-sponsored by both cost reimbursement and fixed-price
contracts. Such engineering effort relates to the design and
development of new products as well as improvements to existing
products. Expenditures for customer-sponsored research, development
and engineering were approximately $3,800,000, $4,100,000 and
$4,200,000 in fiscal 1998, 1997 and 1996, respectively. Additionally,
a portion of new product development work of a conceptual nature is
charged to bid and proposal costs when the development may lead to an
immediate, potential contract.
On July 20, 1998, the Company announced that it had signed an
agreement with a NASD registered investment banking entity to assist
the Company with the enhancement of shareholder value. As a result,
the Company has been party to strategic discussions with a select
group of organizations, both domestic and international, which may
serve to leverage the Company's core technology and intellectual
capital into adjacent, faster growing and higher margin market
segments. Separately, the Company has entered discussions with
various financial institutions regarding it's objective of increasing
the percentage ownership of common stock held by institutional
investors and in order to create greater research coverage of its
common stock by industry analysts and market makers. Although there
can be no certainty as to the ultimate outcome of these efforts,
management believes this effort will contribute to the accomplishment
of its primary goal for fiscal 1999 - increasing shareholder value.
The Company's funded backlog as of September 30, 1998, was
approximately $16 million, compared to approximately $20 million as of
September 30, 1997. The following table sets forth the total backlog,
which includes the value of unexercised options (on U.S. Government
contracts) which the Company believed were likely to be exercised, for
the periods indicated (in thousands):
<TABLE>
As of September 30,
<S> <C> <C> <C>
1998 1997 1996
Backlog $16,000 $23,000 $35,000
</TABLE>
Of the $16 million backlog at 1998 fiscal year end, approximately $15
million is expected to be recognized as revenue prior to September 30,
1999. Most contracts are, by their nature, subject to termination for
cause or default and, on occasion, can be terminated for reasons
beyond the control of the Company.
The Company's backlog reflects several factors that have combined to
reduce sales to the Company's traditional customers for its broadcast
and signal processing products. The first factor has been the end of
the Cold War which has reduced the U.S. Government's requirements for
high power short wave broadcasting systems manufactured by BCD and for
signal processing systems used by U.S. military organizations that are
manufactured by SPD. The second factor is the declining economies in
Asia, Africa, and the Middle East that have reduced civilian budgets
and resulted in cancellation or delay of projects using the Company's
equipment. The third factor, related to the economic decline overseas,
is the increase in value of the U.S. Dollar relative to the currencies
of most of the Company's customers. This has made the Company's
products appear more expensive than those of its foreign competitors.
The Company expects to reverse the decline in its backlog by
redirecting its engineering, manufacturing, and marketing efforts to
products and market segments that are less affected by these general
trends. Among these are digital TV products for the U.S. broadcasting
industry, signal collection systems used by foreign military
organizations for intelligence or other national security operations,
and test and measurement products used by telecommunications
organizations for regulatory operations or system testing. All of
these market segments are growing and present significant sales
opportunities for the Company's new products.
Results of Operations
As an aid to understanding the Company's consolidated operating
results, the following table indicates the percentage relationships of
income and expense items for each of the last three fiscal years.
<TABLE>
Percentage of Revenue
Years Ended September 30,
<S> <C> <C> <C>
1998 1997 1996
Revenue 100.0% 100.0% 100.0%
Operating costs and expenses:
Cost of revenue 72.0% 84.0% 66.8%
Marketing, general and administrative 45.5% 34.8% 33.5%
Loss from operations (17.5)% (18.8)% (0.3)%
Investment income, net 3.0% 3.2% 4.9%
Income (loss) before provision
for income taxes (14.5)% (15.6)% 4.6%
Provision for income taxes .32% .8% 1.4%
Net income (loss) (14.8)% (16.4)% 3.2%
The approximate revenue attributable to contracts from both domestic
and overseas customers is shown below (in thousands):
</TABLE>
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Domestic revenue $9,000 $11,000 $15,000
Overseas revenue 16,200 23,100 17,700
Total $25,200 $34,100 $32,700
</TABLE>
Fiscal 1998 Compared to Fiscal 1997
Revenues for fiscal 1998 decreased by 26% while the net loss decreased
by 33% when compared to fiscal 1997. The delay or loss of key program
awards in Asia, Latin America and Europe adversely affected revenues
in fiscal 1998. Most of these programs were bid under highly
competitive pricing situations. Recent economic uncertainties in Asia
and Latin America, coupled with the devaluation of currencies against
the U.S. dollar, have intensified pricing pressures across all product
lines. In addition, adversely affecting revenues and corresponding
gross profits in fiscal 1998 was the unexpected delay in obtaining
system acceptance of one significant overseas contract. An
exceptionally high management and technical personnel turnover rate
within the customer's organization during the course of the contract
created a lack of understanding of the system's original goals and
objectives and hindered acceptance of the system. The Company
continues to work diligently with the customer to address all
outstanding issues, including the need to conduct additional training
before and after the system acceptance, and using third party
independent experts to assist the customer in the process of system
acceptance. Management remains confident that it will achieve system
acceptance and field a system that meets the customer's expectations.
During fiscal 1998, the Company recorded an adjustment reflecting
management's best estimate of additional cost to bring this contract
to completion. To date, the Company has received payment of
approximately $14,900,000, or 85% of the total contract value. The
Company has an outstanding performance bond equivalent of $1,785,000
or 10% of the contract value.
In order to ensure the success of future projects of this type, the
Company plans to change how these systems are delivered to customers.
In the future, a consulting team consisting of technical, functional
and business experts will be focused on each project from the
beginning. This team will manage the project in partnership with the
customer. As part of the implementation, customers will be able to
run a series of pilot tests to ensure that their ultimate goals and
objectives can be realized at the end of the implementation. An
extensive training curriculum specifically tailored for the customer
will be designed and conducted during system implementation. This
process should serve to eliminate all uncertainties regarding how the
system will work once installed and should contribute substantially to
the stream of "after sale revenue."
The cost of revenue expressed as a percentage of revenue for fiscal
1998 decreased to 72% from 84% last year. This decrease was due to an
inventory adjustment of $2,505,000 made in fiscal year 1997. This
inventory adjustment was the result of lower demand for the BR product
line, which was designed originally for military and specialized
communications purposes. Without the inventory adjustment in fiscal
1997, the cost of revenue would have decreased to 72% from 77%. The
additional favorable decrease of 5% in cost of revenue expressed as a
percentage of revenue was due to the mix of contracts being executed
in fiscal 1997 that had inherently lower margins than those executed
during fiscal 1998.
Marketing, general and administrative expenses expressed as a
percentage of revenue increased to 45.5% from 34.8%. This increase
was partly due to a lower revenue level in fiscal 1998. Actual
marketing, general and administrative expenses decreased by $385,000
in fiscal 1998. This decrease was due largely to lower agent
commission expenses.
Investment income decreased by 30% or $322,000. This decrease was due
to the lower interest rates earned on investments and a decrease in
cash available for investment.
Net loss decreased from $5,582,000 to $3,742,000, or 33%. The decrease
in net loss was due largely to the inventory adjustment made in fiscal
1997 of $2,505,000.
The Company is currently reorganizing itself to focus on achieving
divisional profitability objectives in its product lines. As part of
this effort, the Company will pursue opportunities to reorganize,
consolidate, or eliminate underperforming parts of its current
business while satisfying all of its customer and product support
obligations. The Company will place a greater emphasis on generating
gross profits from its current product offerings. Achieving growth in
sales and earnings represents the Company's ultimate goal and the
Company will be aggressively implementing the growth strategies
imbedded in its current operating plan.
Fiscal 1997 Compared to Fiscal 1996
The revenue growth experienced in fiscal 1997 over fiscal 1996 was
mainly due to the Company's diversification success in the radio
monitoring and spectrum compliance market. Revenue for fiscal 1997
increased by 4% over revenue in fiscal 1996.
Cost of revenue as a percentage of revenue increased by 18% in fiscal
1997 when compared to fiscal 1996. This was due to an inventory write
down in fiscal 1997 of $2,505,000. The inventory write down was a
result of a decrease in customer demand for the existing BR
Communications product line. This product line was originally
designed for military and highly specialized communication purposes.
But such communication requirements are now being satisfied by the use
of various commercial communications mediums which provide faster,
more robust means of communicating, including secure satellite and
other wireless communication technologies. In addition, cost of
revenues reflected the Company's execution of a backlog that consists
of inherently lower margin contracts.
Marketing, general and administrative expense as a percentage of
revenue slightly increased in fiscal 1997 from 33.5% to 34.8%. This
was due largely to the greater emphasis placed on marketing and
selling related activities, as well as a general increase in personnel
costs.
Investment income in fiscal 1997 decreased by $523,000 over fiscal
1996 due to a higher cash balance available for investment in fiscal
1996. The cash balance in fiscal 1996 was positively impacted by a
significant customer deposit received from an overseas contract.
The provision for income taxes in fiscal 1997 was (4.8)% of net loss
before income taxes compared to 29.6% of net income before income
taxes in fiscal 1996. The tax provision recorded in fiscal 1997 was
to cover the Company's foreign tax liability associated with the
execution of a certain contract in a South American country. Because
no tax treaty exists between the U. S. and this South American
country, the Company was not able to offset these tax liabilities with
its net operating loss carryforward originally generated in fiscal
1993.
Net loss as a percentage of revenue in fiscal 1997 was 16.4% compared
to 3.2% in fiscal 1996.
Factors That May Affect Future Operating Results
The Company operates in a highly competitive environment that involves
a number of risks, some of which are beyond the Company's control.
The following discussion highlights some of these risks.
Fluctuations in Operating Results
The Company's operating results may fluctuate from quarter to quarter
and year to year for a number of reasons. While there is no
seasonality to the Company's business, because of the Company's
relative small size, combined with the extended delivery cycles of its
long-term project-oriented business, revenue and accompanying gross
margins are inherently difficult to predict. Because the Company
plans its operating expenses, many of which are relatively fixed in
the short term, based on the assumption of stable performance, a
relatively small revenue shortfall may cause profitability from
operations to suffer. Historically, the Company has endured periods
of volatility in its revenue results due to a number of factors,
including shortfalls in new orders, delays in the availability of new
products, delays in subcontractor provided materials and services, and
delays associated with foreign construction activities. Gross margins
are strongly influenced by a mix of considerations, including
pressures to be the low price supplier in competitive bid
solicitations, the mix of contract material and non-recurring
engineering services, and the mix of newly developed and existing
products sold to various customers. The Company believes these
historical challenges will continue to affect its future business.
The Company intends to leverage its expertise in RF technology
applications and its ability to conduct business in foreign markets by
pursuing outside technology and business acquisitions which complement
various characteristics of its existing core businesses. The Company
expects that the future cost of this product diversification strategy
may be significant enough to generate a loss from operations during
any fiscal quarter through the end of fiscal 1999.
Managing a Changing Business
The Company is in the process of adopting a business management plan
that includes substantial investments in its sales and marketing
organizations, increased funding of existing internal research and
development programs, and certain investments in corporate
infrastructure that will be required to support the Company's
diversification objectives during the next three years. Accompanying
this process are a number of risks, including a higher level of
operating expenses, the difficulty of competing with companies of
larger size for talented technical personnel, and the complexities of
managing a changing business. There also exists the risk the Company
may inaccurately estimate the viability of any one or all of its
diversification efforts and as a result, may experience substantial
revenue shortfalls of a size so significant as to generate losses from
operations.
Risk Associated with Expansion into Additional Markets and Product
Development
The Company believes that its future success is substantially
dependent on its ability to successfully acquire, develop and
commercialize new products and penetrate new markets. In addition to
the Company's ongoing efforts to diversify its product offerings
within its core Broadcast, Signal Processing and Test and Measurement,
the Company intends to pursue a diverse, but focused product and
market development initiative during the next three years. The
Company believes that its general knowledge of RF technology and its
related applications combined with its proven ability to conduct
business in overseas markets can be exploited to return the Company to
an aggressive growth posture. While not strictly limited to these
product areas, the Company is currently pursuing development of
proprietary broad band antenna systems for FM and TV broadcasting and
specialized receivers and processors to increase the usefulness and
reduce the cost of its signal processing and test and measurement
systems. There can be no assurance that the Company can successfully
develop these or any other additional products, that any such products
will be capable of being produced in commercial quantities at
reasonable cost, or that any such products will achieve market
acceptance. Should the Company expend funds to acquire outside
entities or technology, there can be no assurance that sufficient
returns will be realized to offset these investments. The inability
of the Company to successfully develop or commercialize new products
or failure of such products to achieve market acceptance would have a
material adverse effect on the Company's business, financial condition
and results of operations.
Risks Associated with Conducting Business Overseas
A substantial part of the Company's revenue is derived from fixed
priced contracts with foreign governmental entities. With increasing
frequency, the Company finds a demand for its products in third world
countries and developing nations which have an inherently more
volatile and uncertain political and credit risk profile than the U.S.
Government market with which the Company is accustom to conducting its
business. While the Company seeks to minimize the collection risks on
these contracts by normally securing significant advanced payments
with the balance secured by irrevocable letters of credit, the Company
cannot always be assured of receiving full payment for work that it
has performed due to unforeseen credit and political risks.
The Company is in the process of executing contract obligations in a
number of countries that have been subjected to substantial
devaluations of currency during the last fiscal year. While the
majority of payments owed the Company are made in U.S. dollars and are
secured before product shipment with irrevocable letters of credit,
scenarios could occur that make it difficult for the Company to
collect all the money owed against the payment of a given contract.
Should such a default on payments owed the Company ever occur, a
significant effect on earnings, cash flows and cash balances may
result.
Competition
Most all of the Company's products are positioned in niche markets
which include strong elements of imbedded proprietary technology. In
most of these markets, the Company competes with companies of
significantly larger size, many of whom have substantially greater
technical, marketing, and financial resources compared to similar
resources available within the Company. This type of competition has
resulted in and is expected to continue to result in significant price
competition.
Liquidity and Capital Resources
Cash used in operations in fiscal 1998 and fiscal 1997 was $.7 million
and $9.4 million, respectively. Cash provided from operations was
$6.3 million in fiscal 1996. In fiscal 1998 cash used in operations
resulted primarily from a net loss of $3.7 million, a decrease in
accounts payable of $1.9 million, and a prepayment of $1.6 million in
sales tax (VAT) for importation of equipment under an overseas
contract - offset by cash provided by a decrease in accounts
receivable of $4.4 million. The decrease in accounts receivable was
due to the timing between revenue recognition, billings and
collections. Different payment terms are negotiated for each
contract, depending on the customer. The decrease in accounts payable
was primarily due to payments made to a significant subcontractor.
The prepayment for sales tax will be offset against the sales tax to
be collected from the customer which is expected to be final billed in
fiscal 1999. In fiscal 1997 cash provided by operations resulted
primarily from a net loss of $5.6 million, a decrease in accounts
payable of $2.6 million and customer deposit and billing on
uncompleted contracts in excess of revenue recognized of $2.3 million.
In fiscal 1996 cash was principally provided from a net income of $1
million, and an increase in accounts payable of $4.2 million resulting
in total net cash provided from operations of $6.3 million.
Cash of $1 million was used in investing activities in fiscal 1998
through the maturity of short-term investments. Cash provided by
investing activities for fiscal 1997 was $12.5 million and cash used
in investing activities in fiscal 1996 was $2.8 million.
As of September 30, 1998, the Company had approximately $13.5 million
in cash and short-term investments. As of the same date, the Company
had standby letters of credit outstanding totaling approximately $3.6
million. These standby letters of credit are collateralized by the
Company's cash or short-term investments. See further discussion in
Note 8 of the Notes to Consolidated Financial Statements. The Company
currently believes that its cash and expected cash flow from
operations will be sufficient to fund its operations through fiscal
1999.
A significant portion of the Company's revenues is associated with
long-term contracts and programs in which there are significant
inherent risks. These risks include the uncertainty of economic
conditions, dependence on future appropriations and administrative
allotments of funds, changes in governmental policies, difficulty of
forecasting costs and work schedules, product obsolescence, and other
factors characteristic of the industry. Contracts with agencies of
the U.S. Government or with prime contractors working on U.S.
Government contracts contain provisions permitting termination at any
time for the convenience of the Government. No assurance can be given
regarding future financial results as such results are dependent upon
many factors, including economic and competitive conditions, incoming
order levels, shipment volume, product margins and foreign exchange
rates.
The large size of certain of the Company's orders makes it possible
that a single contract termination, cancellation, delay, or failure to
perform could have a significant adverse effect on revenue, results of
operations, and the cash position of the Company.
A portion of the Company's revenues is derived from governments in
areas of political instability. The Company generally attempts to
reduce the risks associated with such instability by requesting
advance payments if appropriate, as well as letters of credit or
central government guarantees. Most of the Company's overseas
contracts provide for payments in U.S. dollars. However, in certain
instances the Company, for competitive reasons, must accept payment in
a foreign currency.
Management does not consider inflation to be a significant factor in
its operations.
Year 2000 Issue
Many currently installed computer systems and software products are
designed to accept only two-digit entries in the date field. Soon,
beginning January 1, 2000, these date fields must accept four digit
entries to distinguish twenty-first century dates from twentieth-
century dates. If a computer system or software product is not "Year
2000 compliant," it may not operate properly during the transition
from December 31, l999 to January 1, 2000, and may not recognize the
year 2000 as a leap year. A non-compliant system or product may
suddenly halt, continue operating but interpret or calculate data
incorrectly, or otherwise operate improperly, causing disruption to
the Company's operations or the operations of others.
In order to minimize the disruption to business and government that
may be caused by computer systems and software products that are not
"Y2K compliant," many companies and government agencies worldwide have
established programs to evaluate and mitigate the risks and adverse
effects of the Y2K problem. Accordingly, the Company has established
a program to review and assess Y2K compliance of its internal business
systems, manufacturing and design tools, current products, products
sold in recent years, and the most critical systems, services and
products supplied to the Company by third parties. The Company has
assigned a program manager, accountable to executive management, to
oversee, coordinate, and report on the Company's Y2K assessment and
remediation efforts.
A four-phase approach has been defined to determine the Year 2000
readiness of the Company's systems, software, equipment, and products.
Such approach is expected to provide a detailed method for tracking
the evaluation, repair, and testing of systems, software, equipment
and products that may be affected by Y2K issues.
Phase 1, Assessment, includes taking an inventory of all systems,
software, equipment and products, and the identification of those with
year 2000 issues which need remediation. Phase 1 also calls for the
preparation of plans needed for remediation. Phase 2, Remediation,
includes repairing, upgrading, and/or replacing any non-compliant
equipment or systems identified in Phase 1. Phase 3, Testing,
includes testing the Company's systems, software, and equipment for
year 2000 readiness, or in certain cases, relying on test results or
certifications provided to the Company by third parties. Phase 4,
Implementation, involves placing compliant systems, software, and
equipment into service.
As part of the Phase 1 effort, the Company began preparing an
inventory of its critically important systems and is currently
determining specific remediation approaches. In doing so, the Company
has determined that it must replace the 15 year old software and
hardware used in its internal business system. This system is used
for numerous day-to-day operations, such as general and project
planning and accounting, purchasing, inventory management, production
planning and control, and quality assurance. A steering committee
comprised of senior management in key functional areas, including
accounting, engineering, marketing and manufacturing, has been
established to oversee the selection and implementation of a new
business system. A detailed assessment of the Company's requirements
for a new business system was completed. The Company plans to start
the implementation process in January 1999 with a target date for
completion in June 1999. If the Company should not complete the
implementation by January 1, 2000, the Company will and has the
capability to operate manually until the implementation is complete.
Also underway during Phase 1 is an inventory of all current Company
products, as well as those which have been delivered to customers in
recent years. This inventory is being reviewed to identify those
products for which the Y2K issue may be critical. Current products,
and recently delivered products still under warranty, will be
corrected as necessary. For older Company products that are
determined to be critically non-compliant, the Company may offer
moderate-cost software or hardware upgrades. Preliminary reviews of
the Company's three major product lines indicate that few products, if
any, are not Y2K compliant.
Although most of the Company's antenna products do not include
computers of any kind, some larger antenna systems rely on small- to
mid-sized computers for automatic monitoring and control functions.
Generally, these computers are not date sensitive and do not perform
date-sensitive calculations. The Company believes that the planned
detailed review of the antenna product line will not reveal any
significant Y2K non-compliances in the antenna product line.
The Company has conducted a preliminary review of its sounder product
line and believes that few products, if any, are critically Y2K non-
compliant. Older ionospheric sounder systems did not incorporate
computers or other devices which were date sensitive, making them
inherently Y2K compliant. However, newer sounder systems, designed
and produced in the last few years, use integrated computers for
system control, data analysis, and data logging. Some of these
computers, using Company-developed software, create and store files
which are identified by dates provided by third-party operating system
software. These systems do not perform calculations or analyses using
date information, but use dates solely to identify stored records.
Based on the preliminary reviews of both the older and newer products,
the Company believes that the planned detailed review of the sounder
product line will not reveal any significant Y2K non-compliances.
The Company's spectrum management products are heavily
dependent on Company developed software and third-party
computers and operating systems. These systems are typically
tasked by external customer equipment to perform certain real
time measurements and analyses, and to report the results
immediately to the customer's equipment. Although the time of
the measurement and analysis is reported back to the
customer's equipment, the date is typically not included.
Since the date is not used in the measurements, analyses, or
reports, the Company believes that its past and current
spectrum-management products are substantially Y2K compliant.
Some systems, however, may require the users to perform
simple, one-time procedures to allow the system to continue
functioning properly after the 1999 to 2000 transition. The
Company expects to identify those systems, develop the
corrective procedures, and notify the users well before the
transition. The cost of this effort has been included in the
Company's estimate of the overall costs to achieve company-
wide Y2K compliance as stated below. The planned, detailed
review of this product line is not expected to reveal any
additional, significant Y2K non-compliances.
In addition to the reviews of its current and past products,
the Company plans to initiate communications with significant
third-party vendors and suppliers whose systems, services or
products are important to the Company's operations. This will
help resolve mutual Y2K issues before they become critical,
and should minimize possible disruptions to the Company's
operations. However, there can be no assurance that Y2K non-
compliant systems and products of other companies on which the
Company relies, and for which the Company has no direct
compliance knowledge or control, will not have an adverse
effect on the Company's operations. If the Company determines
its primary suppliers are not Y2K compliant, then additional
inventory may be purchased prior to January 1, 2000, and or
alternative suppliers that are Y2K compliant may be
identified.
The failure to correct material Year 2000 problems could
result in an interruption in, or a failure of, certain normal
business activities or operations. Such failures could
negatively affect the Company's business, and the general
uncertainty inherent in Y2K problems makes it impossible to
determine at this time whether the consequences of Y2K
failures will have a material adverse impact on the Company's
business.
The Company believes that the greatest single, controllable
risk posed by Y2K non-compliance is its internal business
system, which if uncorrected could result in material business
disruption and the Company's inability to meet committed
product delivery dates. The Company has, therefore, focused
the majority of its current remedial effort on its internal
business system. It expects the timely replacement of the
system will significantly reduce the possibility of Y2K-
related interruptions of its normal operations. In addition
to being Year 2000 complaint, the acquisition of this new
business system will provide more visibility and increase
efficiency in our business processes. The total cost to
address the Year 2000 problem and upgrade the current business
system is estimated to not be more than $1,100,000.
The Company conducts a fair amount of business overseas,
mostly to third world countries. The Company might be
precluded from traveling to these countries because of Y2K
issues beyond its control. This might have a significant
impact on the Company's ability to meet delivery and
installation schedules.
The Company believes it is diligently addressing the Year 2000 issues
and that it will satisfactorily identify and resolve critical and
significant Y2K problems in its operations and products. The
assessment and remediation plan is expected to significantly reduce
the level of uncertainty about the Y2K problem in the Company's
internal systems, its products, and its critical third-party
suppliers. It believes it has assigned adequate resources to its Y2K
compliance plan to complete substantially all phases during fiscal
1999, with major completion milestones in the third and fourth
quarters of fiscal 1999.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting and displaying comprehensive income and its components
in the financial statements. It requires classification of other
comprehensive income, as defined by the standard, by their nature
(e.g., unrealized gains or losses on securities) in a financial
statement, but does not require a specific format for that statement.
The accumulated balance of other comprehensive income is to be
displayed separately from retained earnings and additional paid-in-
capital in the equity section of the balance sheet. This statement is
effective for financial statements issued for fiscal years beginning
after December 15, 1997 and reclassification of financial statements
for earlier periods provided for comparative purposes is required.
The Company does not believe the implementation of this SFAS will have
a material impact on the financial position of the Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." The statement requires
that a public business enterprise report financial and descriptive
information about its reportable operating segments on the basis that
is used internally for evaluating segment performance and deciding how
to allocate resources to segments. This statement is effective for
financial statements issued for fiscal years beginning after December
15, 1997.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives)
and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically
designated and accounted for as (a) a hedge of the exposure to changes
in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable
cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. For a derivative
not designated as hedging instrument, changes in the fair value of the
derivative are recognized in earnings in the period of change. This
statement will be effective for all annual and interim periods
beginning after June 15, 1999, and management does not believe the
adoption of SFAS No. 133 will have a material effect on the financial
position of the Company.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Derivatives and Financial Instruments
Foreign Currency Hedging Instruments
The Company transacts business in various foreign currencies.
Accordingly, the Company is subject to exposure from adverse movements
in foreign currency exchange rates. This exposure is primarily
related to pesos denominated payments in Colombia, a contract
denominated in British pounds sterling and local currency denominated
operating expenses in the U. K. where the Company sells primarily in
U. S. dollars. However, as of September 30, 1998, the Company had no
hedging contracts outstanding.
The Company's U.K. operating expenses are in sterling, which mitigates
a portion of the exposure related to the contract denominated in
sterling. The Company currently does not use financial instruments to
hedge local currency denominated operating expenses in the U.K.
Instead, the Company believes that a natural hedge exists, in that
local currency revenues will substantially offset the local currency
denominated operating expenses. The Company assesses the need to
utilize financial instruments to hedge currency exposures on an
ongoing basis.
The Company does not use derivative financial instruments for
speculative trading purposes, nor does the Company hedge its foreign
currency exposure in a manner that entirely offsets the effects of
changes in foreign exchange rates. The Company regularly reviews its
hedging program and may as part of this review determine at any time
to change its hedging program.
No sensitivity analysis was performed on the Company's hedging
portfolio as of September 30, 1998 as there was no hedging contracts
outstanding as of September 30, 1998.
Fixed income investments
The Company's investments in U.S. corporate securities include
commercial paper. Foreign securities include certificates of deposit
with financial institutions, most of which are denominated in U.S.
dollars. The Company's cash equivalents and short-term investments
have generally been held until maturity. Gross unrealized gains and
losses were negligible as of September 30, 1998.
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investments. The Company places
its investments with high credit quality issuers and, by policy,
limits the amount of credit exposure to any one issuer. The Company's
general policy is to limit the risk of principal loss and ensure the
safety of invested funds by limiting market and credit risk. All
highly liquid investments with a maturity of three months or less at
the date of purchase are considered to be cash equivalents;
investments with maturities between three and twelve months are
considered to be short-term investments. The average interest rate on
the investment portfolio is 5.5%. As of September 30, 1998, there are
no investments with maturities greater than 12 months. The Company
does not expect any material loss with respect to its investment
portfolio.
ITEM 8 - Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements.
ITEM 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable
PART III
ITEM 10 - Directors and Executive Officers of the Registrant
This information is included in Part I of this Report under the
caption "Executive Officers of the Registrant who are not Directors"
following Item 4, and/or will be included in the definitive Proxy
Statement of Registrant filed with the Securities and Exchange
Commission and is incorporated herein by reference.
Compliance with SEC Reporting Requirements
Under the securities laws of the United States, the Company's
directors, executive officers, and any persons holding more than ten
percent of the Company's Common Stock are required to report their
initial ownership of the Company's Common Stock and any subsequent
changes in their ownership to the Securities and Exchange Commission
("SEC"). Specific due dates have been established by the SEC, and the
Company is required to disclose any failure to file by those dates.
Based upon (i) the copies of Section 16(a) reports that the Company
received from such persons for 1998 fiscal year transactions and (ii)
the written representations received from one or more of such persons
that no annual Form 5 reports were required to be filed for them for
the 1998 fiscal year, the Company believes that there has been
compliance with all Section 16(a) filing requirements applicable to
such officers, directors, and ten-percent beneficial owners for such
fiscal year, except that a late Form 5 report was filed for each on
the following non-employee Board members with respect to the option
grant for 6,000 shares of the Company's common stock with an exercise
price of $4.50 per share made to each of them on February 10, 1998
under the automatic option grant program in effect for such non-
employee Board members: Messrs. Hamilton W. Budge, Donald C. Cox,
Asaph H. Hall and C. Alan Peyser.
ITEM 11 - Executive Compensation
This information will be included in the definitive Proxy Statement
filed with the Securities and Exchange Commission and is incorporated
herein by reference.
ITEM 12 - Security Ownership of Certain Beneficial Owners and
Management
This information will be included in the definitive Proxy Statement
filed with the Securities and Exchange Commission and is incorporated
herein by reference.
ITEM 13 - Certain Relationships and Related Transactions
This information will be included in the definitive Proxy Statement
filed with the Securities and Exchange Commission and is incorporated
herein by reference.
PART IV
ITEM 14 - Exhibits, Financial Statement Schedules and Reports on Form
8-K
A. Financial Statements and Schedules
1. Consolidated Financial Statements as identified in the Index o
on Page F-1 of this report.
2. Financial Statement Schedules.
In accordance with Regulation S-X, individual financial statements of
the Registrant and its subsidiaries and other financial statement
schedules are not included herewith because (a) they are not
applicable to or required of the Registrant or (b) the information
required to be set forth therein is included in the financial
statements or other schedules.
B. Reports on Form 8-K
Not applicable.
C. Exhibits
3.1 Restated Certificate of Incorporation of TCI International, Inc.
(Incorporated by reference to Exhibit 3.1 to the Company's Form
10-K for fiscal year ended September 30, 1990; commission file
number 0-10877)
3.2 Bylaws of Technology for Communications International, Inc.
(Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-4 No. 33-11265)
3.3 Amendments to the Bylaws of TCI International, Inc.
(Incorporated by reference to Exhibit 3.3 to the Company's Form
10-K for fiscal year ended September 30, 1988; commission file
number 0-10877)
3.4 Amendment to Restated Certificate of Incorporation of TCI
International, Inc. (Incorporated by reference to Exhibit 3.4 to
the Company's Form 10-Q for the quarter ended March 31, 1992;
commission file number 0-10877)
4.1 Rights Agreement between the Company and Bank of America, NT&SA,
dated December 15, 1989 (Incorporated by reference to Exhibit 1
to the Company's Form 8-K dated January 5, 1990; commission file
number 0-10877)
4.2 First Amendment to Rights Agreement between the Company and Bank
of America, NT&SA. (Incorporated by reference to Exhibit 2 to
the Company's Form 8, Amendment No. 1 dated October 7, 1991;
commission file number 0-10877)
10.1 The Company's Stock Option Plan (1981) as amended. (Incorporated
by reference to Exhibit 28(a) to the Company's Registration
Statement on Form S-8 No. 33-11339 filed on December 29, 1988.)
10.2 Form of Incentive Stock Option Agreement under the Company's
Stock Option Plan (1981). (Incorporated by reference to Exhibit
28(b) to the Company's Registration Statement on Form S-8 No. 33-
11339 filed on December 29, 1988.)
10.3 Form of Non-Qualified Stock Option Agreement under the Company's
Stock Option Plan (1981). (Incorporated by reference to Exhibit
28(c) to the Company's Registration Statement on Form S-8 No. 33-
11339 filed on December 29, 1988.)
10.4 1
995 Non-employee Director Stock Option Plan under the Company's
Stock Option Plan (1981). (Incorporated by reference to Exhibit
99.1, 99.2 and 99.3 to the Company's Registration Statement on
form S-8 No. 33-11339 filed on December 29, 1988.)
10.5 The Company's Employee Stock Ownership Plan (Incorporated by
reference to Exhibit 99 to the Company's Registration Statement
on Form S-8 No. 33-73484 filed on December 27, 1993.)
10.6 Amendment No. 1 to the Company's Employee Stock Ownership Plan
dated as of October 1, 1992. (Incorporated by reference to
Exhibit 10.6 to the Company's Form 10-K for fiscal year ended
September 30, 1996; commission file number 0-10877)
10.7 Plan Amendment to the Company's Employee Stock Ownership Plan
dated as of January 1, 1994. (Incorporated by reference to
Exhibit 10.7 to the Company's Form 10-K for fiscal year ended
September 30, 1996; commission file number 0-10877)
10.8 TCI's 401(k) Plan. (Incorporated by reference to Exhibit 10.21
to TCI's Form 10-K for the fiscal year ended September 30, 1986;
commission file number 0-10877)
10.9 Amendments la, 1b, and 2 to the TCI International, Inc. 401(k)
Plan. (Incorporated by reference to Exhibit 10.15 to the
Company's Form 10-K for fiscal year ended September 30, 1988;
commission file number 0-10877)
10.10 Directors' Indemnification Agreements and Addendum's dated
November 29, 1990. (Incorporated by reference to Exhibit 10.21
to the Company's Form 10-K for fiscal year ended September 30,
1990; commission file number 0-10877)
10.11 Lease between Technology for Communications International and
Justin M. Jacobs, Jr. DBA Caspian Investments, dated May 1, 1992.
(Incorporated by reference to Exhibit 10.23 to the Company's Form
10-Q for the quarter ending March 31, 1992; commission file
number 0-10877)
10.12 Purchase agreement dated December 28, 1995 between
Technology for Communications International and Ministry of
Communications, The Communications Fund, Colombia.
22 List of subsidiaries of TCI International, Inc.
23 Consent of KPMG Peat Marwick LLP
TCI INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
Page
Reference
<S> <C>
Report of KPMG Peat Marwick LLP F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30,
1998 and 1997 F-3
Consolidated Statements of Operations for the
Three Years Ended September 30, 1998 F-4
Consolidated Statements of Stockholders' Equity for the
Three Years Ended September 30, 1998 F-5
Consolidated Statements of Cash Flows for the
Three Years Ended September 30, 1998 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
Independent Auditors' Report
To the Stockholders and Board of Directors of TCI International, Inc.:
We have audited the accompanying consolidated balance sheets of
TCI International, Inc. (the Company) and subsidiaries as of
September 30, 1998 and 1997, and the related statements of
operations, stockholders' equity and cash flows for each of the
years in the three-year period ended September 30, 1998. In
connection with our audits of the consolidated financial
statements, we have also audited the accompanying financial
statement schedule. These consolidated financial statements and
financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of TCI International, Inc. and subsidiaries as of
September 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the years in the three-year
period ended September 30, 1998 in conformity with generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set
forth therein.
KPMG Peat Marwick LLP
Mountain View, California
November 20, 1998
TCI INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
In thousands, except per share amounts
<S> <C> <C>
September 30, 1998 1997
ASSETS
Current assets:
Cash and cash equivalents $8,782 $ 10,439
(Includes restricted cash of $3,558
in 1998, $6,420 in 1997)
Short-term investments 4,754 4,089
Accounts receivable:
Billed, net of allowance of $218
in 1998, and 1997 225 1,234
Unbilled 5,599 8,970
Inventories 1,486 2,118
Prepaid taxes 2,311 785
Prepaid expenses 287 182
Total current assets 23,444 27,817
Property and equipment, net 1,473 1,623
Other assets 314 426
Total assets $25,231 $ 29,866
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,620 $ 3,560
Customer deposits and billings on uncompleted
contracts in excess of revenue recognized 1,491 1,019
Accrued liabilities 5,287 4,738
Total current liabilities 8,398 9,317
Commitments and contingencies (Notes 8 and 10)
Stockholders' equity:
Common stock:
Authorized - 5,000 shares, $.01 par value
Issued - 3,281 shares as of
September 30, 1998 and 1997 11,780 11,780
Shares held in treasury at cost -
70 and 79 shares as of
September 30, 1998 and 1997 (311) (351)
Retained earnings 5,372 9,124
Net unrealized loss on investments (8) (4)
Total stockholders' equity 16,833 20,549
Total liabilities and stockholders' equity $25,231 $29,866
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
TCI INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
In thousands, except per share amounts
Years ended September 30, 1998 1997 1996
<S> <C> <C> <C>
Revenue $25,226 $34,101 $32,695
Operating costs and expenses:
Cost of revenue 18,172 28,650 21,856
Marketing, general and administrative 11,472 11,857 10,941
Total operating costs and expenses 29,644 40,507 32,797
Income (loss) from operations (4,418) (6,406) (102)
Investment income, net 757 1,079 1,602
Income(loss) before provision (credit)
for income taxes (3,661) (5,327) 1,500
Provision for income taxes 81 255 444
Net income (loss) $(3,742) $(5,582) $1,056
Basic earnings per share:
Net income (loss) per share $(1.17) $(1.75) $ .33
Shares used in per share computations 3,207 3,194 3,158
Diluted earnings per share:
Net income (loss) per share $(1.17) $(1.75) $ .31
Shares used in per share computations 3,207 3,194 3,366
</TABLE>
See accompanying Notes to Consolidated Financial Statements
TCI INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
In thousands
Common Net Unrealized
Stock in Gain(Loss)
Common Stock Treasury Retained on
Shares Amount Shares Amount Earnings Investments Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
September 30, 1995 3,281 $11,780 (142) (634) $13,702 $7 $24,855
Stock options exercised - - 40 179 (35) - 144
Net unrealized loss on
investments - - - - - (41) (41)
Net income - - - - 1,056 - 1,056
Balances at
September 30, 1996 3,281 $11,780 (102) $(455) $14,723 $(34) $26,014
Stock options exercised - - 23 104 (17) - 87
Net unrealized gain on
investments - - - - - 30 30
Net loss - - - - (5,582) - (5,582)
Balances at
September 30, 1997 3,281 $11,780 (79) (351) $9,124 (4) $20,549
Stock options exercised - - 9 40 (10) - 30
unrealized loss on
investments - - - - - (4) (4)
Net loss - - - - (3,742) - (3,742)
Balances at
September 30, 1998 3,281 $11,780 (70) $(311) $5,372 $(8) $16,833
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
TCI INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
In thousands
<S> <C> <C> <C>
Year ended September 30, 1998 1997 1996
Cash flows from operating activities:
Operations:
Net income (loss) $(3,742) $(5,582) $1,056
Reconciliation to cash provided by (used in)
operations:
Depreciation and amortization 501 683 557
Changes in assets and liabilities:
Accounts receivable 4,380 (3,567) 723
Inventories 632 3,061 (897)
Prepaid taxes (1,526) (469) (104)
Prepaid expenses and other assets 7 320 (667)
Accounts payable (1,940) (2,563) 4,223
Customer deposits and billings on uncompleted
contracts in excess of revenue recognized 472 (2,317) 1,582
Accrued liabilities 549 1,019 (145)
Cash provided by (used in) operations (667) (9,415) 6,328
Cash flows from investing activities:
Purchases of property and equipment (351) (735) (531)
Purchases of short-term and long-term investments
(7,675) (14,037)(23,266)
Proceeds from maturity of short-term investments 7,006 27,295 20,976
Cash provided by (used in) investing activities (1,020) 12,523 (2,821)
Cash flows from financing activities:
Stock options exercised 30 82 144
Cash provided by financing activities 30 82 144
Net increase (decrease) in cash and cash equivalents (1,657) 3,190 3,651
Cash and cash equivalents at beginning of year 10,439 7,249 3,598
Cash and cash equivalents at end of year $8,782 $ 10,439 $ 7,249
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
TCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements
include the accounts of TCI International, Inc. and its subsidiaries
(collectively, the "Company"). The Company manufactures and markets
signal collection systems, spectrum and frequency management systems,
special purpose communications systems, and antennas and related
equipment for high-power broadcasting, over-the-horizon radar, and
short-wave communication. The Company's products historically have
been sold primarily to U.S. and foreign government agencies, and to a
lesser extent, commercial broadcast entities. The Company has three
wholly-owned subsidiaries, Technology for Communications International
("TCI"), BR Communications ("BR"), and TCI Wireless ("TCIW"). All
significant intercompany balances and transactions have been
eliminated.
Although for presentation purposes the Company has indicated its year
end as September 30, its fiscal year actually ends on the Sunday
nearest to September 30. The Company's fiscal year for 1998, 1997,
and 1996 ended on October 4, September 28, and September 29,
respectively.
Cash Equivalents - Cash equivalents consist of money market
investments, government securities, and commercial paper purchased
with maturity at the date of acquisition of less than 90 days
($8,003,000 as of September 30, 1998 and $10,084,000 as of September
30, 1997). The restricted cash represents the amount held as
collateral for stand-by letters of credit at the end of the fiscal
year.
Fair Value of Financial Instruments - The Company's cash equivalents,
short-term investments, restricted funds, and marketable equity
securities are carried at fair value, based on quoted market prices
for these or similar investments.
Foreign Currency Hedging Instruments - The Company enters into forward
exchange contracts to hedge foreign currency exposures on a continuing
basis for periods consistent with its committed exposures. These
transactions generally do not subject the Company to risk of
accounting loss because gains and losses on these contracts offset
losses and gains on the assets, liabilities, and transactions being
hedged. However, the Company is exposed to credit related losses in
the event of nonperformance by the counterparties in these contracts.
These contracts normally have maturities of less than three months,
and the amounts of unrealized gains and losses are immaterial. At the
end of fiscal 1998 and 1997, the Company had no outstanding foreign
currency forward exchange contracts.
Revenue Recognition - Revenue and costs under cost-reimbursable type
contracts are recognized as costs are incurred and include applicable
fees. Revenues from contracts calling for delivery of standard
products are recognized as the product is shipped. Revenue and costs
under certain long-term fixed-price contracts are recognized on the
percentage-of-completion method, based on total direct and indirect
production costs incurred. Amounts in excess of agreed upon contract
price for customer-directed changes, constructive changes, customer
delays or other causes of additional contract costs are recognized in
contract value if it is probable that a claim for such amounts will
result in additional revenue and the amounts can be reasonably
estimated. Revisions in cost and profit estimates are reflected in
the period in which the facts requiring the revision become known and
are estimable. Losses on contracts are recorded when identified.
Risk Associated with Long-Term Contracts - A significant portion of
the Company's revenue has been associated with long-term contracts and
programs in which there are significant inherent risks. These risks
include the uncertainty of economic conditions, dependence on future
appropriations and administrative allotment of funds, changes in
governmental policies, difficulty of forecasting costs and work
schedules, product obsolescence, and other factors characteristic of
the industry. To offset the expected downturn in revenue from the
sales of signal collection systems, antenna systems, and special
communications equipment to the U.S. Government, the Company will
increasingly focus on overseas and commercial sales. However, many
overseas customers are also experiencing reductions in their defense
equipment budgets. Contracts with the U.S. Government are, by their
terms, subject to termination by the U.S. Government either for its
convenience or for default by the contractor. Additionally, costs
incurred under U.S. Government contracts are subject to audit.
Management believes the results of such audits, when conducted, will
not have a material effect on the Company's financial results (see
Note 6).
A portion of the Company's revenue is derived from governments in
areas of political instability. The Company generally attempts to
reduce the risks associated with such instability by requesting
advance payment if appropriate, as well as letters of credit or
central government guarantees. Most of the Company's overseas
contracts provide for payments in U.S. dollars. However, in certain
instances the Company, for competitive reasons, must accept payment in
a foreign currency.
The large size of certain of the Company's orders make it possible
that a single contract termination, cancellation, delay, or failure to
perform may significantly affect management's estimates and the
Company's performance.
TCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Research and Development Expenses - Marketing, general and
administrative expenses include independent (not directly related to
or funded by a customer contract) research and development costs of
$2,369,000 in fiscal 1998, $1,631,000 in fiscal 1997, and $1,976,000
in fiscal 1996.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out basis) or market and include material, labor, and overhead.
Property and Equipment - Property and equipment are stated at cost and
are depreciated or amortized using the straight-line method over the
following estimated useful lives:
<TABLE>
Years
<S> <C>
Machinery and equipment 3 - 10
Leasehold improvements Remaining life of lease
</TABLE>
Income Taxes - Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are
measured using enacted rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Use of Estimates - The Company's management has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from
those estimates.
Impairment of Long-Lived Assets and Assets to be Disposed Of - The
Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of the asset to the
future cash flows to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or the fair value less costs to sell.
To date, no adjustments to the carrying value of the Company's long-
lived assets have been required.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting and displaying comprehensive income and its components
in the financial statements. It requires classification of other
comprehensive income, as defined by the standard, by their nature
(e.g., unrealized gains or losses on securities) in a financial
statement, but does not require a specific format for that statement.
The accumulated balance of other comprehensive income is to be
displayed separately from retained earnings and additional paid-in-
capital in the equity section of the balance sheet. This statement is
effective for financial statements issued for fiscal years beginning
after December 15, 1997 and reclassification of financial statements
for earlier periods provided for comparative purposes is required.
The Company does not believe the implementation of this SFAS will have
a material impact on the financial position of the Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." The statement requires
that a public business enterprise report financial and descriptive
information about its reportable operating segments on the basis that
is used internally for evaluating segment performance and deciding how
to allocate resources to segments. This statement is effective for
financial statements issued for fiscal years beginning after December
15, 1997.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives)
and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically
designated and accounted for as (a) a hedge of the exposure to changes
in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable
cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. For a derivative
not designated as hedging instrument, changes in the fair value of the
derivative are recognized in earnings in the period of change. This
statement will be effective for all annual and interim periods
beginning after June 15, 1999, and management does not believe the
adoption of SFAS No. 133 will have a material effect on the financial
position of the Company.
TCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Short-term and Long-term Investments
The Company classifies its investments as "available-for-sale
securities" and the carrying value of such securities has been
adjusted to fair market value. The resulting change in fair market
value is reported as a separate component of stockholders' equity.
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value for available-for-sale securities by
major security type at September 30, 1998 and September 30, 1997, were
as follows:
<TABLE>
In thousands
Amortized Gross Unrealized Gross Unrealized Fair
Cost Holding Gains Holding Losses Value
<S> <C> <C> <C> <C> <C>
September 30, 1998
Short-term investments:
Certificates of deposit $3,738 $ - $ (8) $3,730
Government bonds 1,022 - - 1,022
Corporate bonds 2 - - 2
$4,762 $ - $(8) $4,754
September 30, 1997
Short-term investments:
Certificates of deposit $1,271 $ - $ - $1,271
Government bonds 1,812 - (5) 1,807
Corporate bonds 1,010 1 - 1,011
$4,093 $1 $(5) $4,089
</TABLE>
The short-term and long-term cash management portfolio is managed by a
securities investment firm, which invests primarily in bonds, based upon the
Company's investment guidelines. The securities are of investment quality to
ensure safety of principal and are selected by the firm, who has been given
semi-discretionary authority to manage assets in the portfolio.
The Company's short-term investments as of September 30, 1998 have a maturity
date of one year or less.
Investment income consists of the following:
<TABLE>
<S> <C> <C> <C>
Year ended September 30, 1998 1997 1996
(In thousands)
Interest income and other $785 $1,471 $1,602
Realized/unrealized foreign currency loss (28) (392) -
$757 $1,079 $1,602
</TABLE>
TCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Accounts Receivable
Accounts receivable contain amounts which are billed in accordance with the
terms of the related contracts, which may allow for progress billings upon
shipment, billings upon completion, or other billing arrangements. Such
amounts are classified as billedaccount receivables. Unbilled accounts
receivables represent revenue recognized generally under a percentage of
completion basis which, based upon the terms of the related contracts are
not yet billable.
4.Inventories
Inventories consist of the following:
<TABLE>
<S> <C> <C>
September 30, 1998 1997
(In thousands)
Material and component parts $974 $1,535
Work in process 512 583
$1,486 $2,118
</TABLE>
5. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<S> <C> <C>
September 30, 1998 1997
(In thousands)
Machinery and equipment $7,489 $7,818
Leasehold improvements 331 375
7,820 8,193
Accumulated depreciation and amortization (6,347) (6,570)
$1,473 $1,623
</TABLE>
TCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Export Revenue and Revenue from Major Customers
Revenue was derived from sales to customers located in the following
geographic areas:
<TABLE>
Year ended September 30, 1998 1997 1996
(In thousands)
<S> <C> <C> <C>
United States $8,855 $ 10,672 $ 14,977
Europe 3,408 1,753 2,848
Middle East 1,860 - -
Africa 1,027 6,846 3,757
Asia/Pacific Basin 6,954 8,820 3,961
South America 3,090 5,542 6,585
Other 32 468 567
$ 25,226 $ 34,101 $ 32,695
</TABLE>
Sales under U.S. Government prime contracts and subcontracts accounted for 31%,
31%, and 42% of the Company's total revenue in 1998, 1997, and 1996,
respectively, of which the U.S. Government prime contracts accounted for 29%,
27%, and 32%, respectively. Revenue from contracts with the United States
Information Agency (prime contracts and subcontracts) represented 7%, 13%
and 23% of the Company's total revenue for 1998, 1997, and 1996, respectively.
Revenue from three commercial customers represented 14%, 12% and 11%,
respectively, of the Company's total revenue for fiscal 1998; 2%, 2% and 15%,
respectively, for fiscal 1997; and 0%, 0%, and 19%, respectively, for fiscal
1996. The total accounts receivable from these three commercial customers
was approximately $274,000 at the end of fiscal 1998 and $3,893,000 at the
end of fiscal 1997 and none at the end of fiscal 1996.
7. Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<S> <C> <C>
September 30, 1998 1997
(In thousands)
Accrued contract costs $2,882 $2,106
Compensation and employee benefit plans 981 1,098
Accrued vacation 772 835
Other 652 699
$5,287 $4,738
</TABLE>
8. Bank Credit Agreements
The Company has a bank credit agreement that provides a fully secured credit
facility for the issuance of stand-by letters of credits up to $7,000,000.
This credit facility is secured by the Company's cash or short-term
investment portfolio. As of September 30, 1998, $3,400,000 of this credit
line was available for issuance of stand-by letters of credit.
At September 30, 1998, there were outstanding stand-by letters of credit of
approximately $3,600,000 held as bid, performance and payment bonds. The
stand-by letters of credit expire at various dates through the year 2000;
however, certain performance bonds are automatically renewable until
canceled by the beneficiary.
Cash equivalents and short term investments totaling $3,600,000 are held by
banks as collateral for outstanding stand-by letters of credit.
TCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Stockholders' Equity
a. Net Income (Loss) per Share
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 requires the
presentation of basic and diluted earnings per share for companies with
potentially dilutive securities, such as convertible debt, stock options and
warrants. Basic earnings per share are computed using the weighted-average
number of common shares outstanding. Diluted earnings per shares are
computed using weighted-average common shares outstanding after giving effect
to potential common stock from stock options based on the treasury stock
method. Earnings per share for all prior fiscal years presented have been
restated to conform to SFAS No. 128.
A reconciliation of the earnings and shares used in the computation for basic
and diluted earnings per share follows:
<TABLE>
<S> <C> <C> <C>
Year ended September 30, 1998 1997 1996
(In thousands, except per share amounts)
Net income (loss) used for basic
and diluted earnings per share $(3,742) $(5,582) $1,056
Number of shares:
Weighted average common shares outstanding
used for basic earnings per share 3,207 3,194 3,158
Effect of dilutive stock options - - 208
Weighted average common shares outstanding
used for diluted earnings per share 3,207 3,194 3,366
</TABLE>
As of September 30, 1998 and 1997, there were options outstanding to purchase
681,200 and 731,600, respectively, shares of the Company's common stock with
a weighted-average exercise price of $5.49 and $5.75, respectively, which
could potentially dilute basic earnings per share in the future, but which
were not included in diluted earnings per share as their effect was
antidilutive.
b. Employee Benefit Plans
The Company's operating subsidiaries make contributions to their respective
Employee Stock Ownership Plans (ESOP) subject to the approval of the Board of
Directors. Accrued contributions were $200,000 for fiscal 1998, $200,000 for
fiscal 1997, and $200,000 for fiscal 1996. As of September 30, 1998, the
ESOP owns 501,691 of the Company's outstanding shares.
The Company has a 401(k) Plan (the Plan) covering all employees of the
Company. The Plan provides for voluntary salary reduction contributions of
up to 15% of eligible participants' annual compensation. The Company makes
matching contributions of up to 2% of participants' annual compensation. The
Company's accrued contributions to the Plan were $140,000 for fiscal
1998, $150,000 for fiscal 1997, and $136,000 for fiscal 1996.
In 1981, the Company adopted the 1981 Stock Option Plan ("1981 Plan")
pursuant to which the Company's Board of Directors may grant stock options to
key employees, non-employee directors and independent contractors. The 1981
Plan authorizes the grant of options to purchase an aggregate of 1,100,000
shares of Common Stock. Such shares are to be made available either from the
Company's authorized and previously unissued shares of Common Stock or from
shares reacquired by the Company.
Under the 1981 Plan, the Board of Directors has the authority to determine
the time or times at which options granted under the 1981 Plan are to become
exercisable. Options under the 1981 Plan are generally exercisable in annual
increments, on a cumulative basis, during the term of the option. Options
granted may not be exercised after the expiration of ten years from the
date of grant. The options may be granted at not less than the fair market
value of the Common Stock on the date of the option grant.
Stock option activity during the period indicated is as follows:
<TABLE>
Number Weighted Average
of shares Exercise Price
<S> <C> <C>
Options outstanding at Sept 30, 1995 775,650 $6.07
Granted 181,000 6.75
Exercised (40,000) 3.44
Canceled (107,850) 9.27
Options outstanding at Sept 30, 1996 808,800 5.91
Granted 55,000 6.55
Exercised (22,700) 3.61
Canceled (127,500) 7.51
Options outstanding at Sept 30, 1997 713,600 5.75
Granted 27,000 4.56
Exercised (8,900) 3.38
Canceled (50,500) 9.00
Options outstanding at Sept 30, 1998 681,200 $5.49
</TABLE>
At September 30, 1998, there were 264,635 shares available for future
grant under the 1981 Plan. The per share weighted-average fair value
of stock options granted during fiscal 1998 and 1997 was $1.66 and
$2.14 on the date of the grant. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions:
<TABLE>
<S> <C> <C>
1998 1997
Weighted-average risk free
Interest rate 5.25% 6%
Dividend yield 0% 0%
Volatility factor .370 .295
Weighted average expected
Life of an option 4 years 4 years
</TABLE>
TCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company applies APB Opinion No. 25 in accounting for its 1981 Plan
and, accordingly, no compensation cost has been recognized for its
stock options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
optionsunder SFAS No. 123, the Company's net income (loss) and net income
(loss)per share would have been reduced or increased to the proforma
amounts indicated
<TABLE>
<S> <C> <C>
1998 1997
Net income (loss) (in thousands)
As reported $(3,742) $(5,582)
Pro forma (3,863) (5,696)
Net income (loss) per share
As reported $(1.17) $(1.75)
Pro forma (1.21) (1.78)
</TABLE>
Pro forma net income reflects only options granted in 1998 and 1997.
Therefore, the full impact of calculating compensation cost for the stock
options under SFAS No. 123 is not reflected in the pro forma net income or
net loss amounts presented above because compensation cost is reflected over
the options' vesting period of 3 - 5 years and compensation cost for
options granted prior to October 1, 1995 is not considered.
At September 30, 1998, the range of exercise price and weight-average
remaining contractual life of outstanding options was as follows:
<TABLE>
<S>
Option Outstanding Option Exercisable
Range of Number Weighted Average Weighted Average Number Weighted
Exercise Outstanding Remaining Exercise Price Average
Price Contractual Life Exercise
Power
<S> <C> <C> <C> <C> <C>
$2.25 2,500 0.40 years $2.25 2,500 $2.25
3.38 176,200 1.21 years 3.38 173,200 3.38
4.12-4.50 203,000 3.91 years 4.27 111,000 4.26
5.00-5.63 13,000 8.50 years 5.48 3,333 5.63
6.75-6.88 153,000 7.84 years 6.75 101,991 6.75
7.63 45,000 6.59 years 7.63 43,000 7.63
8.25-8.75 23,500 3.41 years 8.68 15,500 8.64
9.50 65,000 1.66 years 9.50 63,000 9.50
681,200 4.11 years 513,524 $5.51
</TABLE>
At September 30, 1998 and 1997, the number of options exercisable was
513,524 and 400,512, respectively, and the weighted-average exercise
price of those options was $5.51 and $6.55, respectively.
TCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Commitments and Contingencies
The Company leases certain of its facilities and equipment under
operating leases which expire at various dates through fiscal 2000 and
require the following minimum payments:
<TABLE>
<S> <C>
Year Ending September 30, Amounts
(in thousands)
1999 $448
2000 315
2001 -
$763
</TABLE>
Rental expense was $545,000, $612,000, and $610,000 in fiscal 1998,
1997, and 1996, respectively.
On December 14, 1994, the California Regional Water Quality Control
Board for the San Francisco Bay Region adopted an order naming the
Company as a potentially responsible party (PRP), along with several
other parties, for ground water contamination in the vicinity of a
property the Company formerly occupied as a tenant in Mountain View,
California. The Company contends that it is not responsible for any
such contamination. In a related development in early 1995, the
Regional Water Board ordered the owner of the property to conduct a
program of soil sampling to determine if the site is currently a
source of ground water contamination. The results of this sampling
program were reviewed by and summarized in a letter from the Regional
Water Board dated October 11, 1995 in which it concluded that the
current levels of contamination do not indicate the site is a source
of ground water contamination presently, and as a result no further
investigative or remedial action is necessary. However, in its
correspondence the Regional Water Board refused to rule out the
possibility that the site was a source of contamination in the past
and as such it has left the matter to be resolved through binding
arbitration. In April, 1997, pursuant to their rights as the largest
PRP, Teledyne, Spectra Physics and Montwood submitted a petition to
convene a hazardous substance cleanup arbitration panel (HASCAP) with
an ultimate goal of determining and apportioning liability for the
cleanup costs amongst all of the PRPs associated with the site. The
Company and the other respondents objected to the convening of an
arbitration panel. On September 24, 1998, the Office of Environmental
Health Hazard Assessment ("OEHHA") advised the parties that the
legislative authority for the arbitration panels had "sunsetted" and
thus OEHHA would take no further action towards ruling on the
respondents' objections or convening a HSCAP arbitration panel unless
the legislature took action to reinstate the legislative authority for
these panels. Should the legislative authority for the HSCAP
arbitration panels be reinstated and should OEHHA overrule the
Company's and the other respondents' objections to the convening of
the panel, the Company may take legal action to dispute the panel's
jurisdiction and in all events will vigorously maintain that it is not
responsible for any of the groundwater extraction system being
operated by Teledyne/Spectra-Physics. At present, there is no
lawsuit, arbitration or other legal or administrative proceeding
pending against the Company regarding this Teledyne/Spectra Physics
matter, and it is possible that no further legal proceedings regarding
this matter and involving the Company will occur.
During 1990, the Company received a notice from an overseas customer
stating that the Company had not fulfilled certain requirements of a
$6,000,000 contract. No legal proceedings have been initiated on this
claim. The Company believes, based upon a review of the customer's
claim and consultation with legal counsel, that the liability, if any,
relating to this claim would not have a material adverse effect on its
results of operations or its financial position.
The Company is from time to time involved in routine litigation or
threatened litigation arising from the ordinary course of its
business. Such matters, if decided adversely to the Company, would
not, in the opinion of management, have a material adverse effect on
the financial condition of the Company.
TCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes
The Company has net operating loss carryforwards for federal income
tax purposes of approximately $4,900,000 which expire through 2013.
The provision for federal income taxes for the years ended September
30, 1998, 1997, and 1996, consist of the following:
<TABLE>
<S> <C> <C> <C>
Years ended September 30, 1998 1997 1996
(In thousands)
Current:
Federal $ - $(160) $396
State 5 415 48
Foreign 76 - -
81 255 444
Deferred:
Federal - - -
State - - -
0 0 0
Total $ 81 $255 $444
</TABLE>
The effective tax rate differed from the statutory federal income tax
rate due to the following:
<TABLE>
<S> <C> <C> <C>
Year ended September 30, 1998 1997 1996
Statutory federal rate 35% 35% 35%
State taxes, net of federal benefit - - 6
Net operating loss not utilized (35) 23 6
Foreign sales corporation - - (19)
Other - (1) -
Foreign (2) 8 -
Effective income tax rate (2)% (5)% 30%
</TABLE>
TCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes, and (b) operating loss and tax credit carryforwards.
Significant components of the Company's net deferred taxes are as
follows:
<TABLE>
<S> <C> <C>
Year ended September 30, 1998 1997
(In thousands)
Deferred tax assets:
Net operating loss carryforward $1,917 $1,338
Long-term contracts 1,043 896
Accruals not currently deductible 1,903 2,507
Differences, in tax basis of property,
plant & equipment 28 -
$4,891 $4,741
Deferred tax liabilities:
Differences in tax basis of property, plant
and equipment - 164
$0 $164
Valuation allowance $4,891 $4,577
Net deferred taxes $0 $0
</TABLE>
A valuation allowance has been recorded for the entire deferred tax
asset as a result of uncertainties regarding the realization of the
asset due to the lack of consistent earnings history for the Company.
The net change in the total valuation allowance for the years ended
September 30, 1998 and September 30, 1997 was an increase of $314,000
and a increase of $2,538,000, respectively.
Cash payments for income taxes were $47,000 in 1998, $362,000 in 1997.
Pursuant to the requirements to Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TCI International, Inc.
Date: December 23, 1998 By: /s/ MARY ANN ALCON
MARY ANN ALCON
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
<TABLE>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ John W. Ballard,III President and Director December 23, 1998
(John W. Ballard, III) (Principal Executive Officer)
/s/ E.M.T. Jones Director December 23, 1998
(E.M.T. Jones)
/s/ John L. Anderson Director December 23, 1998
(John L. Anderson)
/s/ Asaph H. Hall Director December 23, 1998
(Asaph H. Hall)
/s/ Alan C. Peyser Director December 23, 1998
(Alan C. Peyser)
/s/ Donald C. Cox Director December 23, 1998
(Donald C. Cox)
/s/ Slobodan Tkalcevic Director December 23, 1998
(Slobodan Tkalcevic)
</TABLE>
Ref: Form 10-K
1998
TCI INTERNATIONAL, INC.
EXHIBIT INDEX
<TABLE>
<S> <C>
Number Exhibit
22 Schedule II - Valuation and Qualifying Accounts
23 List of Subsidiaries of TCI International, Inc.
24 Consent of KPMG Peat Marwick LLP
EXHIBIT 22
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years ended September 30, 1998, 1997 and 1996
(in thousands)
</TABLE>
<TABLE>
Balance at Charged to Balance at
beginning costs and end of
of period expenses Write-offs period
Allowance for doubtful accounts:
<S> <C> <C> <C> <C>
1996 $ 225 $ - $ 3 $ 228
1997 228 - (10) 218
1998 $ 218 $ - $ - $ 218
</TABLE>
EXHIBIT 23
LIST OF SUBSIDIARIES OF TCI INTERNATIONAL, INC.
- - - - Technology for Communications International, a California
corporation (TCI)
- - - - BR Communications, a California corporation (BR)
- - - - TCI Wireless, a California corporation (TCIW)
EXHIBIT 24
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration
statements (Nos. 33-73484, 33-26353, 33-11339, 2-98005, 2-80875 and
333-21387) on Form S-8 of TCI International, Inc. of our report dated
November 20, 1998, relating to the consolidated balance sheets of TCI
International, Inc. and subsidiaries as of September 30, 1998 and
1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the three-year period ended
September 30, 1998 and the related financial statement schedule,
which report appears in the September 30, 1998 annual report on Form
10-K of TCI International, Inc.
KPMG Peat Marwick LLP
Mountain View, California
December 23, 1998
F-
