UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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 of other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
222 Caspian Drive, Sunnyvale, California 94089-1014
(Address of principal executive offices) (Zip Code)
(408)747-6100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
As of June 30, 1998, 3,209,915 shares of Common Stock were
outstanding.
TCI INTERNATIONAL, INC.
TABLE OF CONTENTS
Part I - Financial Information Page
Item 1. Financial Statements
Condensed Consolidated Statements of Operation 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statement of Cash Flows 5
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 8-13
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
TCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
(In thousands, except per share amounts)
<TABLE>
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
<S> <C> <C> <C> <C>
Revenue $5,814 $5,822 $20,898 $25,962
Operating costs and expenses:
Cost of revenue 3,796 8,757 13,738 22,457
Marketing, general and
Administrative 2,886 2,671 8,325 9,126
6,682 11,428 22,06 31,583
Loss from operations (868) (5,606) (1,165) (5,621)
Investment income, net 166 296 591 988
Loss before provision
for income taxes (702) (5,310) (574) (4,633)
Provision for income taxes 0 (173) 38 44
Net loss $(702) $(5,137) $(612) $(4,677)
Basic and diluted
net loss, per share $(.22) $(1.61) $(.19) $(1.47)
Shares used in per share
computation 3,209 3,199 3,205 3,191
</TABLE>
See accompanying Notes to Condensed Consolidated Financial
Statements.
TCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except per share amounts)
<TABLE>
June 30, September 30,
1998 1997
(Unaudited)
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 4,950 $10,439
(Includes restricted cash
of $1,547 on June 30,1998
$6,420 on Sept 30, 1997)
Short-term investments 5,847 4,089
Accounts receivable -
Billed 1,203 1,234
Unbilled 7,825 8,970
Inventories 1,331 2,118
Prepaid expenses 2,705 967
Total current assets 23,861 27,817
Property and equipment, net 1,652 1,623
Other assets 629 426
Total assets $26,142 $29,866
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities:
Accounts payable $ 915 $3,560
Customer deposits and billings
on uncompleted contracts in
excess of revenue recognized 1,374 1,019
Accrued liabilities 3,892 4,738
Total current liabilities 6,181 9,317
Stockholders' equity:
Common stock, par value $.01;
authorized 5,000 shares;
issued and outstanding 3,281
shares 11,780 11,780
Retained earnings 8,503 9,124
Valuation allowance-short-term
investments (3) (4)
Treasury shares at cost; 71
and 79 shares at Jun. 30, 1998
and Sept 30, 1997, respectively (319) (351)
Total stockholders' equity 19,961 20,549
Total liabilities and
stockholders' equity $26,142 $29,866
</TABLE>
See accompanying Notes to Condensed Consolidated Financial
Statements.
TCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended June 30,
(In thousands)
<TABLE>
1998 1997
<S>
Cash provided by (used in):
Operations: <C> <C>
Net loss $(613) $(4,677)
Reconciliation to cash provided
by operations:
Depreciation 369 524
Changes in assets and liabilities:
Accounts receivable 1,176 (1,332)
Inventories 787 2,328
Prepaid expenses (1,941) 262
Accounts payable (2,645) (2,366)
Customer deposits/billing in excess
of revenue 355 (1,854)
Accrued liabilities (846) 496
Cash used in operations (3,358) (6,619)
Investing activities:
Purchases of property and equipment (398) (624)
Purchases of short-term investments (5,865) (5,900)
Proceeds from sale of investments 4,107 11,749
Cash provided by investing activities (2,156) 5,225
Financing activities:
Stock options exercised 25 68
Cash provided by financing activities 25 68
Net decrease in cash and
cash equivalents (5,489) (1,326)
Cash and cash equivalents
at beginning of period 10,439 7,249
Cash and cash equivalents
at end of period $4,950 $5,923
See accompanying Notes to Condensed Consolidated Financial
Statements
TCI INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1
Basis of Presentation
The unaudited condensed consolidated financial statements
included herein have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes the
information included herein, when read in conjunction with the
financial statements and related notes included in the Company's
Annual Report on Form 10-K for the year ended September 30, 1997,
filed with the Securities and Exchange Commission, to be not
misleading. Further, the following financial statements reflect,
in the opinion of management, all adjustments necessary
(consisting of normal recurring entries) to present fairly the
financial position and results of operations as of and for the
periods indicated.
The results of operations for the nine months ended June 30,
1998, are not necessarily indicative of results to be expected
for the entire year ending September 30, 1998.
Note 2
Inventories consist of the following (in thousands):
</TABLE>
<TABLE>
June 30, September 30
1997 1998
<C> <C>
Material and component parts $1,094 $1,535
Work in process 237 583
$1,331 $2,118
</TABLE>
Note 3
At June 30, 1998 there were outstanding standby letters of credit
of approximately $3,122,000 serving as bid, performance and
payment bonds. The standby letters of credit expire at various
dates through 2000; however, certain performance bonds are
automatically renewable until canceled by the beneficiary. These
outstanding standby letters of credit are fully secured by the
Company's cash or short term investment portfolio.
Note 4
Net Income Per Share
Basic net income per share is computed using the weighted average
number of common shares outstanding. Diluted net income per
share is computed using the weighted average number of common
shares outstanding and dilutive common share equivalents from the
assumed exercise of options outstanding during the period, if
any, using the treasury stock method. No common equivalent
shares are included for loss periods as they would be anti-
dilutive.
Derivative Instruments and Hedging Activities
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Third Fiscal Quarter and Nine Months ended June 30, 1998
Compared to Third Fiscal Quarter and Nine Months ended June 30,
1997
Except for historical information contain herein, the matters
discussed in this report contain forward-looking statements that
involve risks and uncertainties which could cause future results
to differ materially.
Revenue for the third quarter of fiscal year 1998 was $5,814,000,
similar to the revenue of $5,822,000 for the same period a year
ago. Revenue for the first nine months of fiscal year 1998,
however, was $20,898,000 compared to $25,962,000 for the same
period in fiscal year 1997 reflecting a decrease of 20%. This
decrease is due to a lower level of business activity
attributable to a fewer number of contracts being executed by the
Company. Because the Company is experiencing a delay in
obtaining acceptance under one significantly-sized overseas
contract, corresponding recognition of revenue and associated
gross margin on this contract has been delayed. This delay has
had a negative impact on revenue for the third quarter. This
delay may extend into the first quarter of fiscal year 1999.
Although there can be no assurance, it is management's opinion
that the delay in receipt of customer acceptance will be
satisfactorily addressed during the next six months and that the
current budget for this contract is adequate to complete the
contract obligations.
Gross margin expressed as a percentage of revenue for the third
quarter of fiscal year 1998 was 35% compared to (51)% in the
third quarter of fiscal year 1997. Gross margin percentage for
the first nine months of fiscal year 1998 was 34% compared to 14%
for the same period in fiscal year 1997. The gross margin
percentage for the third quarter and the first nine months of
fiscal year 1998 is substantially higher than in fiscal year 1997
due to the 1997 third quarter booking of an inventory valuation
adjustment of approximately $2,500,000 and unfavorable budget
adjustments made to various long-term contracts. The inventory
valuation adjustment of $2,500,000 was deemed necessary due
largely to decreased customer demand for the existing BR
Communications product line. Additionally, budget adjustments
were made to various long-term contracts in the broadcast antenna
and spectrum management product line to reflect previously
unexpected increases in cost to complete estimates for these
contracts.
The Company continues to experience competitive pricing pressure
for new business world-wide, but especially in Asia and Latin
America. More specifically, the Company is experiencing delays
in the receipt of certain expected orders in South Asia due to
the political uncertainties brought about by the recent nuclear
test activities within the region.
The Company's ability to generate consistent revenue growth
remains contingent upon its ability to secure adequate levels of
new business from its core product and new business initiatives.
The Company expects total revenue for fiscal year 1998 to be
lower than revenues recognized during fiscal year 1997.
On July 20, 1998, the Company announced its engagement of Gerken
Capital, Associates, an investment banking firm, to assist
management in the active exploration of various means to enhance
shareholder value. Management is committed to implementing a
strategy to acquire, merge with, buy, or sell business units that
in these forms more rapidly advance the long-term interests of
its shareholders. In this regard, synergistic business
relationships with its two largest product areas, broadcast
antenna products, and the signal collection, direction finding
groups are being actively and aggressively explored. It is
management's view that long-term growth and profitability
objectives will be more easily achieved with a set of strong
strategic relationships with entities where common expenses are
shared and mutual technology efforts can be effectively leveraged
in diverse markets.
Marketing, general and administrative expense for the third
quarter of fiscal year 1998 was $2,886,000 compared to $2,671,000
for the same period a year ago, an increase of $215,000. This
increase is the result of the Company's continuous investment in
independent research and development activities. However,
marketing, general and administrative expenses for the first nine
months of fiscal year 1998 decreased by $801,000 when compared to
the same period a year ago. This decrease is largely due to
smaller representative commission expenses being accrued during
the current fiscal year due to changes in the mix of foreign and
domestic business and the specific sales channels through which
the company's products are sold.
Investment income for the current quarter was $166,000 compared
to $296,000 for the same quarter a year ago. Investment income
for the first nine months of the current fiscal year decreased by
$397,000 compared to the same period in fiscal year 1997 due to a
lower cash and short-term investment balance.
There was no income tax provision recorded during the current
quarter as a result of the Company's plan to utilize its net
operating loss carryforward to offset any tax liability for the
current fiscal year.
The Company's total backlog at June 30, 1998 was $18 million
compared to $23 million at September 30, 1997. The total funded
portion of the Company's backlog at June 30, 1998 was $18 million
compared to $20 million at September 30, 1997. The Company's
funded backlog excludes unfunded and unexercised options.
The results of operations for the first nine months in fiscal
year 1998 are not necessarily indicative of future quarterly or
annual performance expectations.
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. While the Company records revenue on a percentage of
completion basis, unexpected changes in project budgets during
the course of execution can cause revenue and accompanying gross
margins to vary from quarter to quarter. 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 product sold to various
customers. The Company believes these historical challenges will
continue to affect its future business.
The Company intends to effect its product and market
diversification strategy by leveraging its expertise in RF
technology applications and its ability to conduct business in
foreign countries in the pursuit of outside technology and
business acquisitions which complement various characteristics of
its existing core business. Combined with the operating
pressures detailed above, the Company expects that the future
cost of this product diversification strategy may be significant
enough to generate a loss from operations during fiscal year
1998.
Managing of 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 businesses such as the spectrum
management system business, 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 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 various rural communication and
telephony applications using its proprietary technology, certain
transmitter product initiatives in the FM, HDTV and wireless
cable TV markets which compliment the Company's antenna
expertise, and certain RF technologies with potential application
in the markets of tracking various kinds of assets in indoor and
outdoor settings. 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 are 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
accustomed 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 . 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.
Impact of Year 2000
Many currently installed computer systems and software products
are coded to accept only two-digit entries in the date code
field. Beginning in the year 2000, these date code fields will
need to accept four-digit entries to distinguish 21st century
dates from 20th century dates. As a result, in approximately a
year and a half, computer systems and/or software used by the
Company may need to be upgraded to comply with such "Year 2000"
requirements.
The Company has been assessing the impact of Year 2000 issues on
its computer systems and applications. The Company plans to
finish its assessment in the next three months. A remediation
plan will be established with a target date of being full
compliant by June 30, 1999. The Company is also taking into
consideration any effect critical supplier and customers and
their status of Year 2000 issues would have on compliance
program. The Company believes that any future costs relating to
the Year 2000 issue will not have a material impact on the
Company's consolidated financial position, results of operations
or cash flow.
Significant uncertainty exists concerning the potential effects
associated with compliance. Although the Company believes that
it will be Year 2000 compliant, there can be no assurance that
coding errors or other defects will not be discovered in the
future. Any Year 2000 non-compliance could result in a material
adverse effect on the Company's business, financial conditions
and operating results.
TCI INTERNATIONAL, INC.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated cash, cash equivalents and marketable securities
totaled $10,797,000 at June 30, 1998, compared to $14,528,000 at
September 30, 1997. The Company currently believes that its
cash, cash equivalents and short-term investments, together with
expected revenue from operations, will be sufficient to fund its
operations through fiscal year 1999.
A significant portion of the Company's sales 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
currency 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 revenue are 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.
At June 30, 1998, the Company has standby letters of credit
outstanding of approximately $3,122,000 serving as bid,
performance and payment bonds. The standby letters of credit are
collateralized by the Company's cash or short-term investments.
TCI INTERNATIONAL, INC.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits: Exhibit 27.1-Financial Data Schedule
b. Reports on Form 8-K: None
No other applicable items.
TCI INTERNATIONAL, INC.
PART II OTHER INFORMATION
SIGNATURES
Pursuant to the requirements of the Securities and 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.
(Registrant)
Mary Ann W. Alcon
Date Chief Financial Officer
(Duly authorized officer of the registrant
and principal financial officer of the
registrant)
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<NAME> TCI INTERNATIONAL
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