<PAGE>
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, 1999
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 (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
----- -----
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, 1999, the aggregate market value of voting stock held by
non-affiliates was $20,170,272.
As of December 15, 1999, the number of shares of common stock outstanding was
3,361,712.
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 8, 2000 are incorporated by reference into Part III hereof.
- ------------------------------------------------------------------------------
1
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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 AND SERVICES
The Company manufactures specialized transmission and receiving 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 two core product lines: Broadcasting Products,
and Signal Processing Products. The Company's products are sold primarily to
civilian and commercial entities as well as U.S. and foreign government
agencies.
The Company also installs the equipment it manufactures, often on a turnkey
basis. The Company's expert design and manufacturing capabilities, combined with
its ability to manage large projects and installation activities both in the
U.S. and in foreign countries, gives it a competitive advantage.
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 TV, FM, and AM 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 radiation pattern shapes, bandwidth, power handling capability, and
reduced loads on support towers. The Company's structural design expertise
provides a competitive advantage in situations when antenna systems must be
optimized or customized to meet a customer's unique structural requirements.
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 and provide remote messaging
over huge geographic areas without requiring access to cellular telephone or
satellite communications networks. The Company's HF antennas are being used as
the backbone of a major system that was launched in the United States and is
expected to be launched in 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.
2
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MF and HF broadcasting antennas are sold either directly to broadcasters or to
transmitter manufacturers for integration into complete systems. Typical system
orders range in price between $100,000 and $10,000,000. The market for HF and MF
antenna systems has been declining, although there are several large military
and civilian procurements that TCI expects to win. With the advent of digital AM
broadcasting in the next century, the market for the Company's MF and HF
products both in domestic and foreign markets should increase.
Digital television (DTV) broadcasting presents exciting opportunities for the
Company in both the domestic and foreign markets. Within the United States, the
transition to DTV, mandated by the Federal Communications Commission in April
1997, requires all of the approximately 1600 domestic TV stations to install
digital transmission facilities within the next two to six 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. One of the major problems in the
conversion to DTV is the shortage of suitable tower space on which to install
the new antennas. Many existing towers are already at their maximum capacity and
cannot accept new antennas. New towers are difficult to build because of the
lack of optimum locations and/or stringent environmental rules that prohibit or
severely limit new construction. TCI has invented a DTV ultra-high-frequency
(UHF) transmitting antenna that solves many of these problems.
The antenna is a broad-bandwidth slot antenna that can transmit on several
channels simultaneously but imposes a relatively small load on the tower. In
many situations, a broadcaster can replace an existing antenna with TCI's new
product without having to strengthen the tower and yet be able to broadcast both
analog and digital TV signals simultaneously. TCI's antenna also permits
broadcasters to combine transmissions onto the antenna thus freeing up space on
the tower that can be leased to other broadcasting or communication services.
TCI has applied for a patent on this new invention, has made several significant
sales of the product, and expects to make more such sales in the upcoming fiscal
year. In addition to this new antenna product, TCI is also developing a line of
accessory products including combiner systems and broad-bandwidth coaxial
transmission lines that will permit the Company to supply all of the key
elements of a DTV transmitting antenna system.
The Company's ability to supply, install and integrate new DTV antenna systems
as well as provide complete turnkey solutions is proving to be attractive to
many customers. Modern TV stations operate with very few engineers who do not
have the time and/or specialized skills to perform the entire DTV conversion
process themselves. By undertaking many of the project management and
installation activities, TCI not only increases the size of each sale but also
provides valuable services to broadcasters.
Foreign markets also present significant opportunities for sales of 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 world-wide 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 TV
antennas range between $25,000 to $250,000, with turnkey systems ranging between
$100,000 and $2,000,000.
3
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SIGNAL PROCESSING PRODUCTS
The Company's signal processing products are comprised of spectrum management,
direction finding, signal collection, and specialized communications equipment
that are sold primarily to domestic and foreign military and governmental
customers. 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 0.01 to
3000 MHz.
Spectrum management systems are required by all countries in order to manage and
monitor 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. These products comprise
specialized application and database software and proprietary monitoring,
measurement and DF hardware that operate from 10 kHz to 3 GHz. Most of the
requirements for spectrum management systems are driven by the world-wide 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 allows 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 $15,000,000.
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. These systems are based on the same technology that is used in the
Company's civilian spectrum management systems, but with enhanced capabilities
to meet military and intelligence requirements. 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 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 sale prices of complete communications intelligence and DF systems range
from approximately $100,000 to $10,000,000. Certain components of a system are
often sold separately to special customers and are priced at considerably lower
amounts.
The Signal Processing product line also includes specialized equipment to
measure the characteristics of the ionosphere in real time using the Company's
proprietary Chirpsounder-Registered Trademark- technology. This equipment is
used as part of communications, radar, and DF systems that operate in the 2 to
45 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
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.
4
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FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS
The financial results shown in the following tables are presented to comply with
current financial accounting standards relating to business segment reporting.
Information concerning the identifiable assets of the Company's business
segments is contained in the Note, Business Segments in the Notes to
Consolidated Financial Statements. In calculating operating profit, allocation
of certain expenses among the business segments involves the exercise of certain
business judgement.
The company's product offerings are managed and directed by separate management
teams. The products offered by the Broadcast Products and Signal Processing
Products groups are distinct, as are the customers who routinely purchase these
products. While the two business segments currently share facilities and certain
manufacturing resources, most financial metrics used by management to direct the
overall business are organized consistent with the definition of the two
operating units. Please see ITEM 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations for a discussion of the items in
the table below.
Net Revenues and Operating Loss by Business Segment
In thousands
Net Revenues
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Broadcast Products $ 8,860 $ 11,876 $ 18,148
Signal Processing Products $15,882 $ 13,350 $ 15,953
</TABLE>
Operating Loss
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Broadcast Products $ (157) $ (471) $ (785)
Signal Processing Products $ (1,626) $ (3,947) $ (4,665)
Others $ -- $ -- $ (955)
</TABLE>
MARKETING
The Company markets its equipment and systems to commercial and governmental
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 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
The Company manufactures many of the key components of its Broadcasting and
Signal Processing products, however it is implementing a systematic program to
increase the outsourcing of many manufacturing operations that can be done more
effectively, efficiently, and at lower cost by specialized manufacturing
organizations. 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
5
<PAGE>
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 its customers install many of the Company's products, the Company
offers installation services including turn-key project management.
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 signal measuring instruments
manufactured to the Company's specifications either by the Company or by
qualified subcontractors.
To a significant extent, the heart of such systems lies in the proprietary
software that is incorporated into the system. The Company therefore employs a
group of experienced software engineers who design and code the key software on
which the Company's signal processing products are based. After the proprietary
software is incorporated into the system, it is thoroughly tested in a simulated
operating environment prior to final delivery.
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 special osciallator and filter assemblies. 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.
UNITED STATES GOVERNMENT CONTRACTS AND REGULATIONS
Sales to the U.S. Government under prime and subcontracts accounted for 18%,
31%, and 31% of the Company's revenue in fiscal years 1999, 1998, and 1997,
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 1999, 18% 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 31% and 0%,
respectively, in fiscal 1998 and 30% and 1%, respectively, in fiscal 1997.
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.
6
<PAGE>
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 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.
In the U.S. DTV antenna market, the Company's principal competitors are
Dielectric Communications, Andrew Corporation and Harris Corporation. In foreign
TV and DTV markets its principal competitors are Kathrein/SIRA, Rymsa, and RFS.
These are all well-established companies with broad product lines
The Company's principal competitors in the high frequency (HF) communications
antenna market are Andrew Corporation and Antenna Products Corporation. In HF
and MF broadcast antennas market, 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.
SIGNAL PROCESSING PRODUCTS
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.
Competitors in signal processing products in the U.S. market include, CODEM
Systems, Inc., Raytheon, Harris Corporation, Rockwell International Corp.,
Southwest Research Institute (SWRI), Thomson-CSF, Tadiran, and TRW. In foreign
markets, in addition to these competitors are Rohde and Schwarz, Siemens Plessey
& Co., Ltd, and Thomson -CSF.
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 to justify the higher price and therefore
represents a "best value" for the customer.
Additionally, since signal processing and spectrum management systems are
marketed in less developed countries, the ability to offer attractive financing
alternatives also weighs strongly in decision process of many customers. 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."
7
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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, 1999, the Company had 133 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.
8
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ITEM 2 - PROPERTIES
Floor Area (sq. ft.) Lease
Company Expiration
Leased Date
------ ----
Sunnyvale, CA 95,000 2000
The Company is in the process of evaluating its facility requirements and as a
result of this process and consistent with the expiration of certain leases,
expects to relocate to alternate facilities during fiscal year 2000. Management
expects that the pending change in facilities will not significantly disrupt
operations or have a material effect on the Company's financial performance.
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.
Subsequently, the legislative authority for the HSCAP arbitration panels was
reinstated and the Teledyne parties have advised OEHHA that they still wish to
arbitrate the matter. Should OEHHA now overrule TCI's and the other respondents'
objections to the convening of the panel, TCI 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 contamination in the area and should
not share in any of the costs associated with the groundwater extraction system
being operated by Teledyne/Spectra Physics.
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 1999.
9
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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>
<CAPTION>
FISCAL 1999 FISCAL 1998
----------- -----------
Quarter Ended High Low High Low
- ------- ----- ---- --- ---- ---
<S> <C> <C> <C> <C>
December 31 $3.25 $1.38 $6.63 $4.75
March 31 4.50 1.94 5.63 4.38
June 30 3.38 2.38 5.38 4.38
September 30 4.25 2.63 4.94 2.81
</TABLE>
As of September 30, 1999, there were 563 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>
<CAPTION>
Data for the Five Years Ended September 30,
(In thousands, except per share amounts)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue $24,742 $25,226 $34,101 $32,695 $29,354
Operating costs and expenses:
Cost of revenue 16,502 18,172 28,650 21,856 18,672
Marketing, general and administrative 10,023 11,472 11,857 10,941 10,348
Income (loss) from operations (1,783) (4,418) (6,406) (102) 334
Interest income 593 757 1,079 1,602 1,072
Income (loss) before provision (credit)
for income taxes (1,190) (3,661) (5,327) 1,500 1,406
Net income (loss) (1,190) (3,742) (5,582) 1,056 1,311
Basic earnings per share:
Net income (loss) per share (0.37) (1.17) (1.75) .33 .41
Shares used in per share
computations 3,208 3,207 3,194 3,158 3,161
Diluted earnings per share:
Net income (loss) per share (0.37) (1.17) (1.75) .31 .39
Shares used in per share
computations 3,208 3,207 3,194 3,366 3,392
BALANCE SHEET DATA:
Working capital $13,268 $15,046 $18,500 $22,246 $23,172
Total assets 26,729 25,231 29,866 39,192 32,373
Stockholders' equity 15,622 16,833 20,549 26,014 24,855
</TABLE>
10
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QUARTERLY FINANCIAL DATA FOR THE TWO YEARS ENDED SEPTEMBER 30, 1999
Since revenue is generally recognized on a percentage of completion basis,
which is based upon total direct and indirect costs incurred, there are often
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>
<CAPTION>
(In thousands, except per share amounts)
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
FISCAL 1999
Revenue $6,917 $6,507 $6,543 $4,775
Gross profit 2,512 2,304 1,892 1,532
Net income (loss) 220 8 (560) (858)
Net income (loss) per share .07 0 (0.17) (0.27)
FISCAL 1998
Revenue $4,328 $5,814 $8,187 $6,897
Gross profit (loss) (106) 2,018 2,705 2,437
Net income (loss) (3,129) (702) 16 73
Net income (loss) per share (0.97) (0.22) 0 .02
</TABLE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information in this review, along with the Business Segment data shown on
page 5, reflects the Company's continuing 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.
RESEARCH AND DEVELOPMENT
During the last three years the Company has expended approximately $5,700,000
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. Through the first half of
fiscal 1999, the majority of these expenses were incurred by the signal
processing product line. 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 2000. 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
$4,500,000, $3,800,000 and $4,100,000 in fiscal 1999, 1998 and 1997,
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.
11
<PAGE>
BACKLOG
The Company's total backlog as of September 30, 1999, was approximately $28
million, compared to approximately $16 million as of September 30, 1998, an
increase of 75%. 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>
<CAPTION>
As of September 30,
-------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Total Backlog $28,000 $16,000 $23,000
======= ======= =======
</TABLE>
Of the $28 million backlog at 1999 fiscal year end, substantially all of the
backlog is expected to be recognized as revenue prior to September 30, 2000.
In reversing the decline in its backlog, the Company has achieved an
important goal from last year. It has focused its engineering, manufacturing
and marketing resources on products and market segments that are less
dependent on U. S. government contracts. To this end the Company has secured
significant orders in new market areas. Among these are digital TV products
for the U.S. commercial 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. Also, improved economic conditions in Asia,
Africa and the Middle East, and the strengthening of these currencies
relative to the dollar, have been beneficial.
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>
<CAPTION>
Percentage of Revenue
Years Ended September 30,
-------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
Operating costs and expenses:
Cost of revenue 66.7% 72.0% 84.0%
Marketing, general and administrative 40.5% 45.5% 34.8%
Loss from operations (7.2)% (17.5)% (18.8)%
Interest income 2.4% 3.0% 3.2%
Loss before provision
for income taxes (4.8)% (14.5)% (15.6)%
Provision for income taxes .00% .32% .8%
Net loss (4.8)% (14.8)% (16.4)%
</TABLE>
The approximate revenue attributable to contracts from both domestic and
overseas customers is shown below (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Domestic revenue $7,800 $9,000 $11,000
Overseas revenue 16,900 16,200 23,100
------ ------ ------
Total $24,700 $25,200 $34,100
======= ======= =======
</TABLE>
12
<PAGE>
FISCAL 1999 COMPARED TO FISCAL 1998
Revenues for fiscal year 1999 were similar to fiscal 1998, showing a slight
decrease of 2%. The net loss for fiscal 1999, however, decreased by 68%
compared to fiscal 1998. This is attributable, in part, to an improved level
of contract execution as measured by better gross margins across most product
sales. Both fiscal 1998 and 1999 revenues and profitability were negatively
influenced by an unplanned delay in obtaining system acceptance of one
contract for spectrum management equipment. This performance delay caused the
Company to record a negative adjustment during the fourth quarter of fiscal
1998 in the contract completion estimates reflecting management's best
estimate of the costs to ultimately complete the contract. Consistent with
the contract cost estimates in fiscal 1998, management currently expects to
obtain final acceptance from the customer no later than early in calendar
year 2000. While management expects to obtain final contract acceptance
shortly, there can be no guarantee that acceptance will occur in a timely
manner. To date, the Company has received payment of approximately $14.9
million, or 84% of the total contract value. Final payment of the balance of
$2.9 million is depended upon the customer's final acceptance. The Company
also has in place an outstanding performance bond for $1.8 million or 10% of
the contract value.
Revenues for the Signal Processing Products segment increased 19% from $13.3
million in fiscal 1998 to $15.9 million in fiscal 1999. The net loss
decreased by 59%, from $3.9 million in fiscal 1998 to $1.6 million in fiscal
1999. While still lagging management expectations, this improvement in
profitability was made possible by a healthy mix of revenues coming from
sales of its traditional communications intelligence products and more
consistent performance on contracts for spectrum management equipment.
Revenues for the Broadcast Products segment decreased from $11.9 million in
fiscal 1998 to $8.9 million in fiscal 1999, a decrease of 25%. This decrease
in revenues was due to a delay in receiving some significant orders, most of
which are expected in fiscal year 2000. However, the net loss also decreased
in fiscal 1999 compared to fiscal 1998, from $.5 million to $.2 million, a
decrease of 67%. This decrease in net loss in fiscal 1999 was made possible
by improved contract execution and a lower allocation of common expenses.
Cost of revenues in fiscal 1999 expressed as a percentage of revenue
decreased to 67% from 72% in the prior year. This decrease was due in part to
higher margins from contracts in fiscal 1999. Also, in fiscal 1998 the
Company recorded an adjustment to account for the additional cost due to the
delay in obtaining system acceptance of one significant contract in the
Signal Processing Products business segment, which significantly decreased
signal processing margin in that year.
Marketing, general and administrative expenses expressed as a percentage of
revenue decreased from 45% in fiscal 1998 to 41% in fiscal 1999. This
decrease was due to a lower level of expenditure in internal research and
development, due to completion of development of a major product line, and
lower marketing expenses.
Interest income decreased by 22% or $164,000 in fiscal 1999 compared to
fiscal 1998. This is because the Company maintained a lower cash balance for
most of the fiscal year.
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.
Economic uncertainties in Asia and Latin America during this period, 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.
Revenues from the Signal Processing products segment decreased from $16.0
million in fiscal 1997 to $13.3 million in fiscal 1998, due to fewer bookings
in this product segment. The net loss also decreased from $4.7 million in
fiscal 1997 to $3.9 million in fiscal 1998. The Company recorded an inventory
adjustment of $2.5 million in fiscal 1997 for the Signal Processing business
segment. This inventory adjustment was the result of lower demand for the BR
product line, which was originally designed for military and specialized
communications purposes.
Revenues from the Broadcast Products segment in fiscal 1998 decreased by 35%
compared to revenues from the prior year, due to the delay or loss of key
program awards. This product segment faced highly competitive pricing
pressure from its overseas competitors, as well as economic uncertainties in
certain parts of the world. Management made a conscious decision not to
pursue certain lower margin, higher risk revenue opportunities in favor of
beginning to focus resources on obtaining business in growing, potentially
more profitable market segments. While revenues declined substantially from
this business segment, the net loss decreased from $.8 million in fiscal 1997
to $.5 million in fiscal 1998, a decrease of 40%. This is attributable in
part to the practice of allocating certain operating expenses on the basis of
total cost which in 1998 had the effect of substantially reducing the
percentage of operating expense allocation this business segment absorbed
compared to the prior year.
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<PAGE>
The cost of revenue expressed as a percentage of revenue for fiscal 1998
decreased to 72% from 84% the prior year. This decrease was partly due to the
above mentioned inventory adjustment of $2,505,000 made in fiscal year 1997
in the Signal Processing Products segment. The decrease in cost of revenue
expressed as a percentage of revenue was also due to the mix of contracts
being executed in fiscal 1997 that had inherently lower margins compared to
those executed during fiscal 1998.
Marketing, general and administrative expenses expressed as a percentage of
revenue increased to 45% from 35%. 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.
Interest 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.
The 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.
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 2000.
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.
14
<PAGE>
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 provided by operations in fiscal 1999 was $2.3 million compared to cash
used in operation of $.7 million in fiscal 1998. Cash used in operations was
$9.4 million in fiscal 1997. In fiscal 1999 cash provided by operations resulted
primarily from an increase in customer deposits and billings on uncompleted
contracts in excess of revenue recognized of $1.8 million, and an increase in
accrued liabilities of $.7 million. 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 receivables of $4.4 million. In fiscal 1997 cash used in
operations resulted primarily from a net loss of $5.6 million, a decrease in
accounts payable of $2.6 million and customer deposits and billings on
uncompleted contracts in excess of revenue recognized of $2.3 million.
Cash of $.3 million was provided from investing activities in fiscal 1999
through the maturity of short-term investments. Cash used in investing
activities for fiscal 1998 was $1 million and cash provided by investing
activities in fiscal 1997 was $12.5 million.
As of September 30, 1999, the Company had approximately $14.7 million in cash
and short-term investments. As of the same date, the Company had standby
letters of credit outstanding totaling approximately $3.8 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 2000.
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.
15
<PAGE>
Management does not consider inflation to be a significant factor in its
operations.
YEAR 2000 ISSUE
Many computer systems and software products are designed to accept only two
digits for the year entry in date fields. Beginning January 1, 2000, some of
these systems will not be able to properly distinguish dates in the twenty-first
century from those in the twentieth. Such ambiguities could lead to
miscalculations of date-related data. In addition, some computing systems and
software products will not properly recognize the year 2000 as a leap year,
resulting in additional miscalculations of date data. Systems or products that
cannot properly process date data across the twentieth and twenty-first century
transition, or which do not properly process dates within the twentieth century,
are said to be "Y2K non-compliant." A non-compliant system or product may
suddenly halt, continue operating but interpret or calculate data incorrectly,
or otherwise operate improperly, and could cause disruption to the Company's
operations or the operations of others.
In order to minimize the disruption to business and government caused by
computer systems and software products that are not Y2K compliant, companies
and government agencies worldwide have established programs to evaluate and
mitigate the risks and adverse effects of the Y2K problem. Accordingly, the
Company established a program to review and assess the 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 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 was used to determine the Year 2000 readiness of the
Company's systems, software, equipment, and products. Such approach provided
a detailed method for tracking the evaluation, repair, and testing of
systems, software, equipment and products that could have been affected by
Y2K issues.
Phase 1, Assessment, called for the preparation of an inventory of all
business and development systems and software, plant and development
equipment, current and recent products, and suppliers of critical products
and services. Each was to be evaluated to determine its Y2K readiness and the
effect a Y2K failure would have on the Company's operations. Plans were to be
prepared to remediate non-compliant, mission-critical systems, equipment, and
suppliers over which the Company had control. In Phase 2, Remediation,
critically non-compliant systems and equipment identified in Phase 1 were to
be repaired, upgraded, or replaced to bring them into compliance. Phase 3,
Testing, included 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, involved placing compliant systems, software, and equipment
into service.
During the Phase 1 effort, the Company prepared an inventory of its important
business systems and determined specific remediation procedures for those
critical systems that were found to be non-compliant. In doing so, the
Company determined that it should replace the 15-year-old software and
hardware used in its internal business system. This system is used for many
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 composed of senior management in key
functional areas, including accounting, engineering, marketing and
manufacturing, was established to oversee the selection and implementation of
a new business system. The Company selected a new system and began its
implementation in January 1999. At September 30, 1999, the new business
system was fully operational and in daily service.
Also during Phase 1, the Company prepared an inventory of current products, and
products that were delivered to customers in recent years. This inventory was
reviewed to identify those products for which the Y2K issue may be critical to
current users. Current products and recently delivered products still under
warranty, that were found to be non-compliant were corrected as necessary. For
the small number of older Company products that were determined to be
non-compliant, the Company provided simple operational workaround solutions. All
such non-compliances were minor and were corrected at little cost to the
Company.
The small number of non-compliances in the Company's current and recent products
can be attributed to the fact that few of the Company's products process date
data, making them inherently immune to Y2K issues. Those products that do
process date data are primarily in the Company's spectrum management product
line, and all such products were found to be substantially Y2K compliant. Some,
however, may require the users to perform simple, one-time procedures to allow
the equipment to continue functioning properly after the 1999 to 2000
transition. The Company evaluated these systems and, when appropriate, developed
corrective procedures and notified the users. The total cost to evaluate current
and recent products, and to correct non-conformances when appropriate, has been
included in the Company's estimate of the overall costs to achieve company-wide
Y2K compliance as stated elsewhere.
During the assessment phase, the Company inventoried all major operations and
development tools and assessed them for their criticality and Y2K compliance.
Such tools included servers, mainframe and desktop computers,
16
<PAGE>
operating systems, third-party software applications, proprietary development
software, and laboratory and facility test equipment. The Y2K compliance of
critical desktop computers and their associated operating systems was
evaluated using recognized Y2K compliance test software. Third-party
commercial software applications were either tested for compliance or
certified by their manufacturers to be compliant. The few Y2K non-compliances
that were found, primarily in the Company's older mass data storage
computers, were readily accommodated by implementing straightforward
workaround solutions. In addition, the Company inventoried and assessed all
critical facility systems, such as those for security, telephone services,
and HVAC. All were either compliant, or were updated to be compliant.
To help disclose potential Y2K problems with suppliers of critical products
or services, the Company conducted a survey of those suppliers that are
likely to be delivering products to the Company in late 1999. Respondents
generally indicated a high degree of awareness of the problem and substantial
efforts toward remediation. Since the suppliers that the Company considers
critical will change as it receives orders and completes deliveries
throughout the remainder of 1999, additional reviews of the readiness of its
critical suppliers may continue into the early part of 2000. If the Company
determines that a critical supplier is not Y2K compliant, and that such
non-compliance could jeopardize the timely delivery of critical materials or
services, then contingency plans may be executed to mitigate the effects.
There can be no assurance, however, that Y2K non-compliant systems or
products of suppliers 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. The failure of others to correct material
Year 2000 problems could result in the interruption, or failure, of certain
normal business activities or operations of the Company, and such failures
could negatively affect the Company's business. The widespread, general
uncertainty inherent in the Y2K problem makes it impossible to determine at
this time whether Y2K failures will occur, and whether they will have a
material adverse impact on the Company's business.
The Company conducts a certain amount of its business overseas, often in
third-world countries. Normal international business travel could be delayed
or interrupted because of Y2K issues beyond its control. This could, in turn,
have a significant impact on the Company's ability to meet delivery and
installation schedules in affected areas.
The Company believes that the greatest single, controllable risk posed by Y2K
non-compliance was in its internal business system, which if uncorrected
could have resulted in material business disruption and the Company's
inability to meet committed product delivery dates. The Company, therefore,
committed significant resources to replace this system, thereby reducing the
possibility of Y2K-related interruptions of its normal operations. In
addition to being Year 2000 complaint, the new business system is providing
greater visibility of operating data, and is expected to increase the
efficiency of numerous business processes.
The Company believes it has diligently addressed the Year 2000 issues and
that it has satisfactorily identified and resolved critical Y2K problems in
its operations and products. The total cost to address Year 2000 issues and
to upgrade the internal business system was approximately $1,000,000. While
there can be no assurance that unpredictable, unforeseen, or uncontrollable
Y2K failures will not adversely affect the Company's operations, the Company
believes that the completion of its assessment and remediation plan has
significantly reduced the level of uncertainty and risks posed by the Y2K
problem.
RECENT ACCOUNTING PRONOUNCEMENTS
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 recognizes 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, 2000, and management does not believe the adoption of SFAS No. 133 will
have a material effect on the financial position of the Company.
17
<PAGE>
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. As of September 30, 1999, the Company had an open
foreign exchange contract in the amount of $130,000 to hedge off-balance sheet
commitment to a supplier. As of September 30, 1999, there were no significant
differences between the forward and spot rate on that date.
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, 1999.
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, 1999.
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 investments
portfolio is 5.6%. As of September 30, 1999, 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
18
<PAGE>
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.
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 SCHEDULE AND REPORTS ON FORM 8-K
A. FINANCIAL STATEMENTS AND SCHEDULE
1. Consolidated Financial Statements as identified in the Index on Page
F-1 of this report.
2. Financial Statement Schedule.
In accordance with Regulation S-X, individual financial statements of the
Registrant and its subsidiaries and other financial statement schedule 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.
19
<PAGE>
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 1995 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)
20
<PAGE>
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 LLP
21
<PAGE>
TCI INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Report of KPMG LLP F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30,
1999 and 1998 F-3
Consolidated Statements of Operations and Comprehensive Loss
for the Three Years Ended September 30, 1999 F-4
Consolidated Statements of Stockholders' Equity for the
Three Years Ended September 30, 1999 F-5
Consolidated Statements of Cash Flows for the Three Years
Ended September 30, 1999 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
TCI International, Inc.:
We have audited the accompanying consolidated balance sheets of TCI
International, Inc. (the Company) and subsidiaries as of September 30, 1999
and 1998, and the related consolidated statements of operations and
comprehensive loss, stockholders' equity and cash flows for each of the years
in the three-year period ended September 30, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended September 30, 1999 in conformity with generally
accepted accounting principles.
KPMG LLP
Mountain View, California
November 22, 1999
F-2
<PAGE>
TCI INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
In thousands, except per share amounts
September 30, 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $11,310 $ 8,782
(Includes restricted cash of $3,846 in 1999, $3,558
in 1998)
Short-term investments 3,360 4,754
Accounts receivable:
Billed, net of allowance of $209 in 1999,
and $218 in 1998 2,434 225
Unbilled 3,416 5,599
Inventories 1,704 1,486
Prepaid taxes 1,724 2,311
Prepaid expenses 427 287
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 24,375 23,444
- ---------------------------------------------------------------------------------------------------------------------------
Property and equipment, net 2,033 1,473
Other assets 321 314
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $26,729 $25,231
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,830 $ 1,620
Customer deposits and billings on uncompleted
contracts in excess of revenue recognized 3,310 1,491
Accrued liabilities 5,967 5,287
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 11,107 8,398
- ---------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock:
Authorized - 5,000 shares, $.01 par value
Issued - 3,281 shares as of September 30, 1999
and 1998 11,780 11,780
Shares held in treasury at cost - 76 and 70
shares as of September 30, 1999 and 1998, (326) (311)
respectively
Retained earnings 4,176 5,372
Accumulated other comprehensive losses (8) (8)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 15,622 16,833
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $26,729 $25,231
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
TCI INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
In thousands, except per share amounts
- ---------------------------------------------------------------------------------------------------------------------------
Years ended September 30, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $24,742 $25,226 $ 34,101
- ------------------------------------------------------------------------------------------------------------------------------------
Operating costs and expenses:
Cost of revenue 16,502 18,172 28,650
Marketing, general and administrative 10,023 11,472 11,857
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 26,525 29,644 40,507
- ------------------------------------------------------------------------------------------------------------------------------------
Loss from operations (1,783) (4,418) (6,406)
Interest income 593 757 1,079
- ------------------------------------------------------------------------------------------------------------------------------------
Loss before provision
for income taxes (1,190) (3,661) (5,327)
Provision for income taxes - 81 255
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss $(1,190) $(3,742) $(5,582)
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss):
Unrealized gain (loss) on investments - (4) 30
- ------------------------------------------------------------------------------------------------------------------------------------
Net comprehensive loss $(1,190) $(3,746) $(5,552)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per share:
Net loss per share $(0.37) $(1.17) $ (1.75)
Shares used in per share computations 3,208 3,207 3,194
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-4
<PAGE>
TCI INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
In thousands
- ------------------------------------------------------------------------------------------------------------------------------------
Common Accumulated
Stock in Other Comprehensive
Common Stock Treasury Retained Gain
Shares Amount Shares Amount Earnings (Loss) Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 income - - - - (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
Net 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
Stock options exercised - - 3 11 (6) - 5
Repurchase of common stock for treasury - - (9) (26) - - (26)
Net Loss - - - - (1,190) - (1,190)
- --------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1999 3,281 $11,780 (76) $(326) $4,176 $(8) $15,622
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
TCI INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
In thousands
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended September 30, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Operations:
Net loss $(1,190) $(3,742) $(5,582)
Reconciliation to cash provided by (used in) operations:
Depreciation and amortization 543 501 683
Changes in assets and liabilities:
Accounts receivable (26) 4,380 (3,567)
Inventories (218) 632 3,061
Prepaid taxes 587 (1,526) (469)
Prepaid expenses and other assets (147) 7 320
Accounts payable 210 (1,940) (2,563)
Customer deposits and billings on uncompleted
contracts in excess of revenue recognized 1,819 472 (2,317)
Accrued liabilities 680 549 1,019
- ------------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operations 2,258 (667) (9,415)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (1,103) (351) (740)
Purchases of short-term investments (10,304) (7,675) (14,037)
Proceeds from maturity of short-term investments 11,698 7,006 27,295
- ------------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) investing activities 291 (1,020) 12,518
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Stock options exercised 5 30 87
Repurchase of common stock for treasury (26) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities (21) 30 87
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,528 (1,657) 3,190
Cash and cash equivalents at beginning of year 8,782 10,439 7,249
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $11,310 $8,782 $ 10,439
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
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 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.
DESCRIPTION OF BUSINESS - 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.
FISCAL YEAR END - 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 1999, 1998, and
1997 ended on October 3, October 4, and September 28, 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 3 months ($7,281,000 as of September 30,
1999 and $8,003,000 as of September 30, 1998). The restricted cash represents
the amount held as collateral for stand-by letters of credit at the end of
the fiscal year. For purposes of the Statements of Cash Flows, the Company
considers all highly liquid debt instruments with original maturities of
three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash, cash
equivalents, accounts receivable and accounts payable approximate fair value
because of the short maturities of such investments. The Company's short-term
investments 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.
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 plans to
increase 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.
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.
F-7
<PAGE>
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 financial
performance. Both in fiscal 1999 and 1998, the Company experienced an
unanticipated delay in obtaining final customer acceptance of one significant
contract for spectrum management equipment. Management currently expects to
obtain final acceptance on this contract in early calendar year 2000;
however, there can be no assurance that acceptance will occur in a timely
manner. At September 30, 1999, the Company is contingently liable on a
performance bond related to this contract for $1,785,000, which is 10% of the
contract value. The accompanying consolidated financial statements contain
management's estimates of cost to complete this contract; however, because of
the uncertainty surrounding acceptance of this contract, there is a
reasonable possibility that material changes in management's estimates both
positive or negative might occur.
F-8
<PAGE>
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 $1,717,000 in fiscal 1999,
$2,369,000 in fiscal 1998, and $1,631,000 in fiscal 1997.
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:
Years
- ------------------------------------------------------------------------------
Machinery and equipment 3 - 10
Leasehold improvements Shorter of estimated useful life or lease term
- ------------------------------------------------------------------------------
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.
STOCK OPTION PLAN - The Company accounts for its stock option plan in
accordance with the intrinsic method of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees."
COMPREHENSIVE LOSS - Effective fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting
Comprehensive Income," which establishes standards for reporting and
disclosures of comprehensive income and its components in a full set of
financial statements. Comprehensive loss is comprised of net loss and
unrealized gains and losses on short-term investments and is presented in the
Consolidated Statements of Operations and Comprehensive Loss. SFAS No. 130
requires only accounting disclosure in the consolidated financial statements.
It does not affect the Company's financial position or results of operation.
Prior year financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
RECENT ACCOUNTING PRONOUNCEMENTS 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, 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, 2000, and management does
not believe the adoption of SFAS No. 133 will have a material effect on the
financial position of the Company.
F-9
<PAGE>
TCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SHORT-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, 1999 and September 30, 1998, were as follows:
<TABLE>
<CAPTION>
In thousands
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Fair
Cost Holding Gains Holding Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
eptember 30, 1999
Short-term investments:
Certificates of deposit $3,292 $ - $ (8) $3,284
Corporate bonds 76 - - 76
- ------------------------------------------------------------------------------------------------------------------------------------
$3,368 $ - $ (8) $3,360
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The short-term investments 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. Substantially all of the
Company's short-term investments have maturities of one year or less.
F-10
<PAGE>
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 billed account 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>
<CAPTION>
- -------------------------------------------------------------------------------
September 30, 1999 1998
---- ----
(In thousands)
- -------------------------------------------------------------------------------
<S> <C> <C>
Material and component parts $1,326 $ 974
Work in process 378 512
- -------------------------------------------------------------------------------
$1,704 $ 1,486
- -------------------------------------------------------------------------------
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
September 30, 1999 1998
---- ----
(In thousands)
- -------------------------------------------------------------------------------
<S> <C> <C>
Machinery and equipment $8,321 $ 7,489
Leasehold improvements 331 331
- -------------------------------------------------------------------------------
8,652 7,820
Accumulated depreciation and amortization (6,619) (6,347)
- -------------------------------------------------------------------------------
$2,033 $1,473
- -------------------------------------------------------------------------------
</TABLE>
F-11
<PAGE>
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>
<CAPTION>
- ------------------------------------------------------------------------------------
Year ended September 30, 1999 1998 1997
---- ---- ----
(In thousands)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $ 7,803 $ 8,855 $10,672
Europe 3,468 3,408 1,753
Middle East 1,532 1,860
Africa 921 1,027 6,846
Asia/Pacific Basin 9,556 6,954 8,820
South America 1,416 3,090 5,542
Other 46 32 468
- ------------------------------------------------------------------------------------
$24,742 $25,226 $34,101
- ------------------------------------------------------------------------------------
</TABLE>
Sales under U.S. Government prime contracts and subcontracts accounted for 18%,
31%, and 31% of the Company's total revenue in 1999, 1998, and 1997,
respectively, of which the U.S. Government prime contracts accounted for 17%,
29%, and 27%, respectively.
Four customers represented 12%, 20%, 10% and 11%, respectively, of total revenue
for fiscal 1999 and 0%, 36%, 11% and 10% of total accounts receivable at
September 30, 1999. One customer represented 14% of total revenue for fiscal
1998 and 5% of total accounts receivable at September 30, 1998.
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
September 30, 1999 1998
---- ----
(In thousands)
- ------------------------------------------------------------------------------------
<S> <C> <C>
Accrued contract costs $2,261 $2,564
Accrued commission 652 318
Compensation and employee benefit plans 1,365 981
Accrued vacation 781 772
Other 908 652
- ------------------------------------------------------------------------------------
$5,967 $5,287
- ------------------------------------------------------------------------------------
</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, 1999, $3,150,000 of this credit line was
available for issuance of stand-by letters of credit.
At September 30, 1999, there were outstanding stand-by letters of credit of
approximately $3,850,000 held as bid, performance and payment bonds. The
stand-by letters of credit expire at various dates through the year 2001;
however, certain performance bonds are automatically renewable until canceled by
the beneficiary.
Cash equivalents and short term investments totaling $3,850,000 are held by
banks as collateral for outstanding stand-by letters of credit at September 30,
1999.
F-12
<PAGE>
TCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. STOCKHOLDERS' EQUITY
a. NET LOSS PER SHARE
Basic and diluted net loss per share has been computed using the
weighted-average number of common shares outstanding. Diluted net loss per share
does not include the effect of the common equivalent shares as the effect of
their inclusion is antidilutive during each period. As of September 30, 1999,
1998 and 1997, there were options outstanding to purchase 827,400, 681,200, and
713,600, respectively, shares of the Company's common stock with a
weighted-average exercise price of $4.41, $5.49, and $5.75, respectively, which
could potentially dilute basic earnings per share in the future.
b. EMPLOYEE BENEFIT PLANS
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. In fiscal 1998 and 1997, the Company
made matching contributions of up to 2% of participants' annual compensation; in
fiscal 1999 the Company increased its matching contributions to up to 5% of
eligible participants' annual compensation. The Company's contributions to the
Plan were approximately $360,000 for fiscal 1999, $140,000 for fiscal 1998, and
$150,000 for fiscal 1997.
Historically, the Company made contributions to the Employee Stock Ownership
Plans (ESOP) subject to the approval of the Board of Directors. In fiscal 1999,
the Company elected to freeze the Employee Stock Ownership Plan. Thus, the
Company does not plan to make any contributions to the plan in the future.
Accrued contributions were $200,000 for fiscal 1998, and $200,000 for fiscal
1997. As of September 30, 1999, the ESOP owns 414,839 of the Company's
outstanding shares.
c. STOCK OPTION PLAN
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>
<CAPTION>
- --------------------------------------------------------------------------------------
Number Weighted Average
of shares Exercise Price
- --------------------------------------------------------------------------------------
<S> <C> <C>
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
Granted 234,000 2.25
Exercised (2,500) 2.25
Canceled (85,300) 7.13
- --------------------------------------------------------------------------------------
Options outstanding at Sept 30, 1999 827,400 $ 4.41
- --------------------------------------------------------------------------------------
</TABLE>
At September 30, 1999, there were 107,035 shares available for future grant
under the 1981 Plan. The per share weighted-average fair value of stock options
granted during fiscal 1999 and 1998 was $ .78 and $1.66 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>
<CAPTION>
- --------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Weighted-average risk free
Interest rate 5.00% 5.25%
Dividend yield 0% 0%
Volatility factor .351 .370
Weighted average expected
Life of an option 4 years 4 years
</TABLE>
F-13
<PAGE>
TCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company uses the intrinsic value method to account 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 options, the Company's net loss
and net loss per share would have increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss (in thousands)
As reported $(1,190) $(3,742) $(5,582)
Pro forma (1,318) (3,863) (5,696)
Net loss per share
As reported $(0.37) $(1.17) $(1.75)
Pro forma (0.41) (1.21) (1.78)
- --------------------------------------------------------------------------------------
</TABLE>
At September 30, 1999, the range of exercise price and weight-average remaining
contractual life of outstanding options was as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Option Outstanding Option Exercisable
- ----------------------------------------------------------------------------------------------------
Range of Number Weighted Average Weighted Average Number Weighted
Exercise Outstanding Remaining Exercise Price Average
Price Contractual Life Exercise Price
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.13 - 2.25 214,500 6.36 years $2.13 3,334 $2.13
3.38 - 3.75 188,900 0.95 years 3.40 169,400 3.38
4.12 - 4.50 182,000 2.79 years 4.27 142,000 4.26
5.00 - 5.63 13,000 7.50 years 5.48 7,666 5.55
6.75 142,000 6.84 years 6.75 142,000 6.75
7.63 35,000 5.49 years 7.63 34,000 7.63
8.25 - 8.75 21,000 2.70 years 8.73 17,000 8.72
9.50 31,000 1.38 years 9.50 31,000 9.50
- ----------------------------------------------------------------------------------------------------
827,400 4.12 years $4.41 546,400 $5.28
- ----------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1999 and 1998, the number of options exercisable was 546,400
and 513,524, respectively, and the weighted-average exercise price of those
options was $5.28 and $5.51, respectively.
F-14
<PAGE>
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 future
minimum payments of $315,000.
Rental expense was $463,000, $545,000, and $612,000 in fiscal 1999, 1998, and
1997, 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.
Subsequently, the legislative authority for the HSCAP arbitration panels was
reinstated and the Teledyne parties have advised OEHHA that they still wish to
arbitrate the matter. Should OEHHA now overrule TCI's and the other respondents'
objections to the convening of the panel, TCI 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 contamination in the area and should
not share in any of the costs associated with the groundwater extraction system
being operated by Teledyne/Spectra Physics.
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.
F-15
<PAGE>
TCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES
The Company has net operating loss carryforwards for federal and state income
tax purposes of approximately $7,194,000, $2,723,000, respectively, which expire
through 2014 and 2004, respectively.
The provision for income taxes, all current, for the years ended September 30,
1999, 1998, and 1997, consist of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Years ended September 30, 1999 1998 1997
---- ---- ----
(In thousands)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal $ - $ - $(160)
State - 5 415
Foreign 76 -
- -------------------------------------------------------------------------------------
Total - 81 255
- -------------------------------------------------------------------------------------
</TABLE>
The effective tax rate differed from the statutory federal income tax rate due
to the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Year ended September 30, 1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal rate 35% 35% 35%
State taxes, net of federal benefit (1) - -
Net operating loss not utilized (34) (35) 23
Foreign - 2 8
Other - - (1)
- -------------------------------------------------------------------------------------
Effective income tax rate 0% (2)% (5)%
- -------------------------------------------------------------------------------------
</TABLE>
F-16
<PAGE>
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>
<CAPTION>
- --------------------------------------------------------------------------------------
Year ended September 30, 1999 1998
(In thousands)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $2,681 $1,917
Long-term contracts 737 1,043
Accruals not currently deductible 2,221 1,903
Differences, in tax basis of property,
plant & equipment 150 28
- --------------------------------------------------------------------------------------
$5,789 $4,891
- --------------------------------------------------------------------------------------
Valuation allowance $5,789 $4,891
- --------------------------------------------------------------------------------------
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, 1999 and September 30,
1998 was an increase of $898,000 and an increase of $314,000, respectively.
Cash payments for income taxes were $0 in 1999 and $47,000 in 1998.
12. OPERATING SEGMENTS
The Company is structured primarily around its product lines and the markets it
serves and operates in two business segments: Broadcast Products and Signal
Processing Products.
The Broadcast Products segment 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 TV, FM, and AM 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. These
systems are installed in both domestic and foreign locations for both government
and commercial organizations.
The Company's Signal Processing Products segment offers spectrum management,
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.
Selected information by operating segments is summarized below (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net Revenues
Broadcast Products $ 8,860 $ 11,876 $ 18,148
Signal Processing Products$15,882 $ 15,882 $ 13,350 $ 15,953
Operating Loss
Broadcast Products $ (157) $ (471) $ (785)
Signal Processing Products$(1,626) $ (1,626) $ (3,947) $ (4,665)
Others $ -- $ -- $ (955)
Identifiable assets:
Broadcast Products $ 3,981 $ 5,106 $ 6,696
Signal Processing Products 3,781 2,672 6,093
</TABLE>
F-17
<PAGE>
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 24, 1999 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.
SIGNATURE TITLE DATE
/S/ John W. Ballard, III President and Director December 24, 1999
- -------------------------- (Principal Executive Officer) ----------------------
(John W. Ballard)
/S/ E.M.T. Jones Director December 24, 1999
- -------------------------- ----------------------
(E.M.T. Jones)
/S/ John L. Anderson Director December 24, 1999
- -------------------------- ----------------------
(John L. Anderson)
/S/ Asaph H. Hall Director December 24, 1999
- ------------------------- ----------------------
(Asaph H. Hall)
/S/ Alan C. Peyser Director December 24, 1999
- ------------------------- ----------------------
(Alan C. Peyser)
/S/ Donald C. Cox Director December 24, 1999
- ------------------------- ----------------------
(Donald C. Cox)
/S/ Slobodan Tkalcevic Director December 24, 1999
- ------------------------- ----------------------
(Slobodan Tkalcevic)
F-18
<PAGE>
Ref: Form 10-K
1999
TCI INTERNATIONAL, INC.
EXHIBIT INDEX
NUMBER EXHIBIT
- --------------------------------------------------------------------------------
22 Schedule II - Valuation and Qualifying Accounts
23 List of Subsidiaries of TCI International, Inc.
24 Consent of KPMG LLP
<PAGE>
EXHIBIT 22
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years ended September 30, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
beginning costs and end of
of period expenses Write-offs period
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
1997 $ 228 $ - $ (10) $ 218
1998 $ 218 $ - $ - $ 218
1999 $ 218 $ - $ (9) $ 209
</TABLE>
<PAGE>
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)
<PAGE>
EXHIBIT 24
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
TCI International, Inc.:
The audits referred to in our report dated November 22, 1999, included the
related financial statement schedule for each of the years in the three-year
period ended September 30, 1999, included in the annual report on Form 10-K.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material
respects, the information set forth therein.
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 22, 1999,
relating to the consolidated balance sheets of TCI International, Inc. and
subsidiaries as of September 30, 1999 and 1998, and the related consolidated
statements of operations and comprehensive loss, stockholders' equity, and
cash flows for each of the years in the three-year period ended September 30,
1999 and the related financial statement schedule, which report appears in
the September 30, 1999 annual report on Form 10-K of TCI International, Inc.
KPMG LLP
Mountain View, California
December 24, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-1-1998
<PERIOD-END> SEP-30-1999
<CASH> 11,310
<SECURITIES> 3,360
<RECEIVABLES> 5,850
<ALLOWANCES> 0
<INVENTORY> 1,704
<CURRENT-ASSETS> 24,375
<PP&E> 8,652
<DEPRECIATION> 6,619
<TOTAL-ASSETS> 26,729
<CURRENT-LIABILITIES> 11,107
<BONDS> 0
0
0
<COMMON> 11,780
<OTHER-SE> 3,842
<TOTAL-LIABILITY-AND-EQUITY> 26,729
<SALES> 24,742
<TOTAL-REVENUES> 24,742
<CGS> 16,502
<TOTAL-COSTS> 16,502
<OTHER-EXPENSES> 10,023
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,783)
<INCOME-TAX> 593
<INCOME-CONTINUING> (1,190)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,190)
<EPS-BASIC> (.37)
<EPS-DILUTED> (.37)
</TABLE>
