<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- --- THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
-------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- --- THE SECURITIES EXCHANGE ACT OF 1934
For the transition period N/A
Commission file number: 0-10877
TCI INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3026925
(State of other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
222 CASPIAN DRIVE, SUNNYVALE, CALIFORNIA 94089-1014
(Address of principal executive offices) (Zip Code)
(408)747-6100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of June 30, 1999, 3,205,109 shares of Common Stock were outstanding.
1
<PAGE>
TCI INTERNATIONAL, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-17
Item 3. Market Rate Sensitive Instruments 11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
</TABLE>
2
<PAGE>
TCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 6,507 $ 5,814 $ 17,825 $ 20,898
-------- -------- -------- --------
Operating costs and expenses:
Cost of revenue 4,203 3,796 12,097 13,738
Marketing, general and administrative 2,405 2,886 7,549 8,325
-------- -------- -------- --------
6,608 6,682 19,646 22,063
-------- -------- -------- --------
Loss from operations (101) (868) (1,821) (1,165)
Investment income, net 109 166 411 591
-------- -------- -------- --------
Income (loss) before provision
for income taxes 8 (702) (1,410) (574)
Provision for income taxes 0 0 0 38
-------- -------- -------- --------
Net income (loss) $ 8 $ (702) $ (1,410) $ (612)
-------- -------- -------- --------
-------- -------- -------- --------
Basic earning per share:
Net income (loss), per share $ 0 $ (.22) $ (.44) $ (.19)
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in per share
computation 3,205 3,209 3,210 3,205
-------- -------- -------- --------
-------- -------- -------- --------
Fully diluted earning per share:
Net income (loss), per share $ 0 $ (.22) $ (.44) $ (.19)
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in per share
computation 3,256 3,209 3,210 3,205
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
TCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except per share amounts)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 7,090 $ 8,782
(Includes restricted cash of $4,085 at June 30, 1999,
$3,558 at Sept 30, 1998)
Short-term investments 1,271 4,754
Accounts receivable:
Billed 1,523 225
Unbilled 7,192 5,599
Inventories 2,110 1,486
Prepaid taxes 2,283 2,311
Prepaid expenses 352 287
-------- --------
Total current assets 21,821 23,444
Property and equipment, net 2,255 1,473
Other assets 319 314
-------- --------
Total assets $ 24,395 $ 25,231
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,427 $ 1,620
Customer deposits and billings on uncompleted
contracts in excess of revenue recognized 1,130 1,491
Accrued liabilities 5,428 5,287
-------- --------
Total current liabilities 8,985 8,398
-------- --------
Stockholders' equity:
Common stock, par value $.01; authorized 5,000
shares; issued and outstanding 3,281 shares 11,780 11,780
Retained earnings 3,956 5,372
Accumulated other comprehensive loss 0 (8)
Treasury shares at cost; 76 shares at
June 30, 1999 and 70 shares at Sept 30, 1998 (326) (311)
-------- --------
Total stockholders' equity 15,410 16,833
-------- --------
Total liabilities and stockholders' equity $ 24,395 $ 25,231
-------- --------
-------- --------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
TCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30,
(In thousands)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash provided by (used in):
Operations:
Net loss $ (1,410) $ (612)
Reconciliation to cash used in operations:
Depreciation 377 368
Changes in assets and liabilities:
Accounts receivable (2,891) 1,176
Inventories (624) 787
Prepaid taxes 28 0
Prepaid expenses and other assets (70) (1,941)
Accounts payable 807 (2,645)
Customer deposits/billing in excess of revenue (361) 355
Accrued liabilities 141 (846)
-------- --------
Cash used in operations (4,003) (3,358)
-------- --------
Investing activities:
Purchases of property and equipment (1,159) (398)
Purchases of short-term investments (7,344) (5,865)
Proceeds from sale of short-term investments 10,835 4,107
-------- --------
Cash provided by (used in) investing activities 2,332 (2,156)
-------- --------
Financing activities:
Stock options exercised 5 25
Treasury stock purchases (26) 0
-------- --------
Cash provided by (used in) financing activities (21) 25
Net decrease in cash and cash equivalents (1,692) (5,489)
Cash and cash equivalents at beginning of period 8,782 10,439
-------- --------
Cash and cash equivalents at end of period $ 7,090 $ 4,950
-------- --------
-------- --------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
TCI INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
The unaudited condensed consolidated financial statements included herein have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The Company believes the information included herein,
when read in conjunction with the financial statements and related notes
included in the Company's Annual Report on Form 10-K for the year ended
September 30, 1998, filed with the Securities and Exchange Commission, to be not
misleading. Further, the accompanying financial statements reflect, in the
opinion of management, all adjustments necessary (consisting of normal recurring
entries) to present fairly the financial position and results of operations as
of and for the periods indicated.
The results of operations for the nine months ended June 30, 1999, are not
necessarily indicative of results to be expected for the entire year ending
September 30, 1999.
NOTE 2
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
--------- -------------
<S> <C> <C>
Material and component parts $ 819 $ 974
Work in process 1,291 512
------ ------
$2,110 $1,486
------ ------
------ ------
</TABLE>
NOTE 3
At June 30, 1999 there were outstanding standby letters of credit of
approximately $4,493,000 serving as performance and payment bonds. The standby
letters of credit expire at various dates through 2001; however, certain
performance bonds are automatically renewable until canceled by the beneficiary.
These outstanding standby letters of credit are fully secured by the Company's
cash or short term investment portfolio.
NOTE 4
Basic per share amounts are computed using the weighted average number of common
shares outstanding during the period. Diluted per share amounts are computed
using the weighted average number of common and dilutive common equivalent
shares outstanding during the period. Dilutive common equivalent shares consist
of common stock issuable upon the exercise of stock options using the treasury
stock method.
6
<PAGE>
TCI INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following schedule reconciles, in thousands, the shares used in the
Company's basic and diluted net income (loss) per share calculation.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Basic earnings per share weighted
average shares outstanding 3,205 3,209 3,210 3,205
Effect of dilutive securities options
outstanding 51 0 0 0
----- ----- ----- -----
Denominator for diluted earnings
per share - adjusted weighted
average shares 3,256 3,209 3,210 3,205
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
As of June 30, 1999 and 1998, there were options outstanding to purchase 841,900
and 706,700, respectively, shares of the Company's common stock which could
potentially dilute earnings per share in the future.
NOTE 5
In June 1997, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 130, Reporting Comprehensive Income, which establishes standards for
reporting and disclosures of comprehensive income and its components (revenues,
expenses, gains and losses) in financial statements. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997 and requires reclassification
of financial statements for earlier periods to be provided for comparative
purposes. The Company has not determined the manner in which it will present the
information required by SFAS No. 130 in its annual financial statements for the
year ended September 30, 1999. The Company's total comprehensive loss for all
periods presented herein would not have differed from those amounts reported as
net income (loss) in the statements of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." The statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments on the basis that is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. This statement is effective for financial statements issued for fiscal
years beginning after December 15, 1997.
7
<PAGE>
TCI INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated and accounted for as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of a net investment
in a foreign operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction. For a
derivative not designated as a 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, as amended by SFAS No. 137. Management does not believe the
adoption of SFAS No. 133 will have a material effect on the financial position
of the Company.
8
<PAGE>
TCI INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Third Fiscal Quarter and Nine Months ended June 30, 1999
Compared to Third Fiscal Quarter and Nine Months ended June 30, 1998
Except for historical information contained herein, the matters discussed in
this report contain forward-looking statements that involve risks and
uncertainties which could cause future results to differ materially. The results
of operations for the first nine months of fiscal year 1999 are not necessarily
indicative of future quarterly or annual performance expectations.
Revenue for the third quarter was $6,507,000, an increase of 12%, compared to
revenue of $5,814,000 for the same period in fiscal year 1998. This was due
largely to the timing of receipt of fiscal year 1999 bookings and the execution
of these contracts: almost half of the fiscal year 1999 year to date bookings
were received in the first quarter. Revenue for the first nine months of fiscal
year 1999, however, was $17,825,000, a decrease of approximately 15% from
revenues of $20,898,000 for the same period a year ago. This decrease in revenue
was due, primarily, to a lower backlog entering fiscal year 1999 and delays in
receiving expected new orders. Fluctuations in revenue from one quarter to the
next are inherent in the nature of the Company's business due to the
project-oriented nature of the business. Based upon existing backlog and subject
to unanticipated future delays, the Company expects revenue for fiscal year 1999
to be at approximately the same level as revenue for fiscal year 1998.
Gross margin expressed as a percentage of revenue for the third quarter of
fiscal year 1999 when compared to the same period in fiscal year 1998 were
approximately the same, at 35%. Gross margin expressed as a percentage of
revenue for the first nine months of fiscal year 1999 decreased from 34% to 32%
when compared to the same period a year ago. This decrease in gross margin as a
percentage of revenue in fiscal year 1999 was due to the mix of contracts the
Company is executing. The Company expects gross margin expressed as a percentage
of revenue to remain at approximately the current year to date level for the
remainder of the fiscal year.
Marketing, general and administrative expenses for the third quarter of fiscal
year 1999 decreased by $481,000 from $2,886,000 to $2,405,000 when compared to
the third quarter in fiscal year 1998. This decrease was primarily due to
reduction in internal research and development expenses in the current quarter.
Marketing, general and administrative expenses for the first nine months
decreased by 9% compared to the same period in fiscal 1998. As a percentage of
revenue, however, marketing, general and administrative expenses increased from
40% last year to 42% this year due to this year's lower revenue base.
9
<PAGE>
TCI INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Third Fiscal Quarter and Nine Months ended June 30, 1999
Compared to Third Fiscal Quarter and Nine Months ended June 30, 1998
Net income for the third quarter of fiscal year 1999 was significantly better
than in the same period a year ago. Third quarter fiscal year 1999 showed a net
income of $8,000 compared to a net loss of $702,000 in the third quarter of
fiscal year 1998. However, due to a lower total revenue base this fiscal year,
net loss for the first nine months of fiscal year 1999 was $1,410,000 compared
to a net loss of $612,000 in fiscal year 1998.
The Company's total backlog at June 30, 1999 was $25 million compared to $16
million at September 30, 1998. The total funded portion of the Company's backlog
at June 30, 1999, was $15 million compared to $16 million at September 30, 1998.
The Company's funded backlog excludes unfunded contracts and unexercised
options.
The Company's total bookings for the first nine months of fiscal year 1999 was
$15.8 million compared to $18.7 million in fiscal year 1998.
10
<PAGE>
TCI INTERNATIONAL, INC.
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 payments denominated in
Colombian pesos, a contract denominated in British pounds sterling, local
operating expenses in U.K. denominated in the British pounds and occasional
equipment purchases in other European currencies. As of June 30, 1999, the
Company held $625,000 of aggregate foreign currency forward exchange hedge
contracts to buy deutsche marks in 1999 at a weighted average rate of 1.72. As
of June 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
June 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 June 30, 1999.
The Company's exposure to market risk for changes in interest rates relate
primarily to the Company's investments. The Company places its investments with
high credit quality issuers and, by policy, limits the amount of credit exposure
to any one issuer. The Company's general policy is to limit the risk of
principal loss and ensure the safety of invested funds by limiting market and
credit risk. All highly liquid investments with a maturity of three months or
less at the date of purchase are considered to be cash equivalents; investments
with maturities between three and twelve months are considered to be short-term
investments. The average interest rate on the investment portfolio is 4.9%. As
of June 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.
11
<PAGE>
TCI INTERNATIONAL, INC.
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 relatively 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. Since the
Company records revenue on a percentage of completion basis, unexpected changes
in project budgets during the course of execution can cause revenue and
accompanying gross margins to vary from quarter to quarter. Because the Company
plans its operating expenses, many of which are relatively fixed in the short
term, based on the assumption of stable performance, a relatively small revenue
shortfall may cause profitability from operations to suffer. Historically, the
Company has endured periods of volatility in its revenue results due to a number
of factors, including shortfalls in new orders, delays in the availability of
new products, delays in subcontractor provided materials and services, and
delays associated with foreign construction activities. Gross margins are
strongly influenced by several factors, including pressures to be the low price
supplier in competitive bid solicitations, the mix of contract material and
non-recurring engineering services, and the mix of newly developed and existing
product sold to various customers. The Company believes these historical
challenges will continue to affect its future business.
In order to address these challenges, the Company intends to pursue a product
and market diversification strategy. By leveraging its expertise in RF
technology applications, and its ability to conduct business in foreign
countries, the Company will pursue outside technology and business acquisitions,
which complement various characteristics of its existing core business. Combined
with the operating pressures detailed above, the Company expects that the future
cost of this product diversification strategy may be significant enough to
generate a loss from operations during fiscal year 1999.
MANAGING A CHANGING BUSINESS
The Company is in the process of adopting a business management plan that
includes substantial investments in its sales and marketing organizations,
increased funding of existing internal research and development programs, and
certain investments in corporate infrastructure that will be required to support
the Company's diversification objectives during the next three years. Inherent
in 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.
12
<PAGE>
TCI INTERNATIONAL, INC.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
RISK ASSOCIATED WITH EXPANSION INTO ADDITIONAL MARKETS AND PRODUCT DEVELOPMENT
The Company believes that its future success is substantially dependent on its
ability to successfully acquire, develop and commercialize new products and
penetrate new markets. In addition to the Company's ongoing efforts to diversify
its product offerings within its core businesses such as the spectrum management
system business, the Company intends to pursue a diverse, but focused product
and market development initiative during the next three years. The Company
believes that its general knowledge of RF technology and its related
applications combined with its ability to conduct business in overseas markets
can be exploited to return the Company to an aggressive growth posture. While
not strictly limited to these product areas, the Company is currently pursuing
certain product and turnkey project initiatives in the FM and digital TV
transmission equipment markets which compliment the Company's antenna expertise.
There can be no assurance that the Company can successfully develop these or any
other additional products, that any such products will be capable of being
produced in commercial quantities at reasonable cost, or that any such products
will achieve market acceptance. Should the Company expend funds to acquire
outside entities or technology, there can be no assurance that sufficient
returns will be realized to offset these investments. The inability of the
Company to successfully develop or commercialize new products or failure of such
products to achieve market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH CONDUCTING BUSINESS OVERSEAS
A substantial part of the Company's revenue is derived from fixed priced
contracts with foreign governmental entities. With increasing frequency, the
Company finds a demand for its products in third world countries and developing
nations which have an inherently more volatile and uncertain political and
credit risk profile than the U.S. Government market with which the Company is
accustomed to conducting its business. While the Company seeks to minimize the
collection risks on these contracts by normally securing significant advanced
payments with the balance secured by irrevocable letters of credit, the Company
cannot always be assured of receiving full payment for work that it has
performed due to unforeseen credit and political risks. Should such default on
payments owed the Company ever occur, a significant effect on earnings, cash
flows and cash balances may result.
COMPETITION
Most 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.
13
<PAGE>
TCI INTERNATIONAL, INC.
LIQUIDITY AND CAPITAL RESOURCES
June 30, 1999 Compared to September 30, 1998
Consolidated cash, cash equivalents and marketable securities totaled $8,361,000
at June 30, 1999, compared to $13,536,000 at September 30, 1998. The Company
currently believes that its cash, cash equivalents and short-term investments,
together with expected revenues from operations, will be sufficient to fund its
operations through fiscal year 2000.
Cash used in operations for the first nine months of fiscal year 1999 was $4.0
million compared to $3.4 million for the first nine months in fiscal year 1998.
Cash used in the first nine months of fiscal year 1999 resulted primarily from
the net loss of $1.4 million and an increase in accounts receivable of $2.9
million, an increase in inventories of $.6 million, offset by an increase in
accounts payable of $.8 million. Cash provided in investing activities in the
first nine months of fiscal year 1999 was $2.3 million.
The Company's working capital at June 30, 1999 was $13 million compared to $15
million at September 30, 1998. The decrease in working capital in the current
fiscal year was largely due to continued losses from operations. The Company
does not currently have a bank credit line or other credit facility. At June 30,
1999, the Company has standby letters of credit outstanding of approximately
$4,493,000. The standby letters of credit are collateralized by the Company's
cash or short-term investments.
The capital expenditure budget for the current fiscal year is approximately $1.4
million of which approximately $1.2 million was expended during the first nine
months of the fiscal year.
14
<PAGE>
TCI INTERNATIONAL, INC.
YEAR 2000 ISSUE
Many currently installed computer systems and software products are designed to
accept only two-digit entries in the date field. Soon, beginning January 1,
2000, these date fields must accept four digit entries to distinguish
twenty-first century dates from twentieth-century dates. If a computer system or
software product is not Year 2000 compliant, it may not operate properly during
the transition from December 31, 1999 to January 1, 2000, and may not recognize
the year 2000 as a leap year. A non-compliant system or product may suddenly
halt, continue operating but interpret or calculate data incorrectly, or
otherwise operate improperly, causing disruption to the Company's operations or
the operations of others.
In order to minimize the disruption to business and government that may be
caused by computer systems and software products that are not Y2K compliant,
many companies and government agencies worldwide have established programs to
evaluate and mitigate the risks and adverse effects of the Y2K problem.
Accordingly, the Company has established a program to review and assess Y2K
compliance of its internal business systems, manufacturing and design tools,
current products, products sold in recent years, and the most critical systems,
services and products supplied to the Company by third parties. The Company has
assigned a program manager, accountable to executive management, to oversee,
coordinate, and report on the Company's Y2K assessment and remediation efforts.
A four-phase approach has been defined to determine the Year 2000 readiness of
the Company's systems, software, equipment, and products. Such approach is
expected to provide a detailed method for tracking the evaluation, repair, and
testing of systems, software, equipment and products that may be affected by Y2K
issues.
Phase 1, Assessment, includes taking an inventory of all systems, software,
equipment and products, and the identification of those with year 2000 issues
which need remediation. Phase 1 also calls for the preparation of plans needed
for remediation. Phase 2, Remediation, includes repairing, upgrading, and/or
replacing any critically non-compliant equipment or systems identified in Phase
1. Phase 3, Testing, includes testing the Company's systems, software, and
equipment for year 2000 readiness, or in certain cases, relying on test results
or certifications provided to the Company by third parties. Phase 4,
Implementation, involves placing compliant systems, software, and equipment into
service.
As part of the Phase 1 effort, the Company prepared an inventory of its
important business systems and determined specific remediation procedures for
those considered critically non-compliant. In doing so, the Company determined
that it must 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
comprised 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, with a June 1999 target
date for completion. At June 1, 1999, the new system was operational and in
service.
15
<PAGE>
TCI INTERNATIONAL, INC.
YEAR 2000 ISSUE
Also during Phase 1, an inventory was taken of all current Company products, as
well as those which have been delivered to customers in recent years. This
inventory was reviewed to identify those products for which the Y2K issue may be
critical to the current users. Current products, and recently delivered products
still under warranty, that have been found to be non-compliant are being
corrected as necessary. Non-compliances have been minor and have been corrected
at little cost to the Company. For the small number of older Company products
that were determined to be non-compliant, the Company provided simple
operational workaround solutions.
Although most of the Company's antenna products do not include computers of any
kind, some larger antenna systems rely on small- to mid-sized computers for
automatic monitoring and control functions. Generally, these computers are not
date sensitive and do not perform date-sensitive calculations. The Company's
review of the antenna product line has not revealed any significant Y2K
non-compliances.
The Company has completed a review of the current products in its ionospheric
sounder product line and has determined that all are Y2K compliant. It has also
completed a review of sounder systems delivered in recent years. One such system
was determined to be non-compliant, and its user was notified of the
non-compliance and was offered a simple workaround solution at no charge. The
company incurred no significant expense to remediate the non-compliance of this
older system.
The Company's spectrum management products incorporate Company-developed
software and third-party computers and operating systems. Typically, these
systems are tasked by external customer equipment to perform certain real time
measurements and analyses, and to report the results to the customer's
equipment. Although the time of the measurement and analysis is reported back to
the customer's equipment, the date is usually not included. Since the date is
not used in the measurements, analyses, or reports, the Company has determined
that its past and current spectrum-management products are substantially Y2K
compliant. Some systems, however, may require the users to perform simple,
one-time procedures to allow the equipment to continue functioning properly
after the 1999 to 2000 transition. The Company evaluated most of these systems
and, when appropriate, developed corrective procedures and notified the users.
The total cost of this effort has been included in the Company's estimate of the
overall costs to achieve company-wide Y2K compliance as stated elsewhere.
In addition to the reviews of its current and past products, the Company has
initiated communications with significant third-party suppliers whose products
and services are important to the Company's operations. This helps resolve
mutual Y2K issues before they become critical, and should minimize possible
disruptions to the Company's operations. However, there can be no assurance that
Y2K non-compliant systems and products of other companies on which the Company
relies, and for which the Company has no direct compliance knowledge or control,
will not have an adverse effect on the Company's operations. If the Company
determines that critical suppliers are not Y2K compliant, and that such
non-compliances may affect the timely delivery of critical materials or
services, then contingency plans (such as the purchase of additional inventory
prior to
16
<PAGE>
TCI INTERNATIONAL, INC.
YEAR 2000 ISSUE
December 31, 1999) may be executed to mitigate the adverse effects. The
suppliers that the Company considers critical will change as it receives orders
and completes deliveries throughout the remainder of 1999. Therefore, the review
of its suppliers' Y2K readiness will be ongoing into the early part of 2000. To
help determine supplier compliance, the Company conducted a mail survey of those
suppliers which are likely to be delivering critical materials or services in
late 1999. Respondents generally indicated a high degree of awareness of the
problem and substantial efforts toward remediation.
The failure to correct material Year 2000 problems could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could negatively affect the Company's business, and
the general uncertainty inherent in Y2K problems makes it impossible to
determine at this time whether the consequences of Y2K failures will have a
material adverse impact on the Company's business.
The Company believes that the greatest single, controllable risk posed by Y2K
non-compliance is 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 has, therefore, focused the
majority of its current remediation effort on its internal business system. It
expects the replacement of the system has significantly reduced 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 will increase efficiency in the business processes. The
total cost to address the Year 2000 problem and upgrade the current business
system is estimated to be less than $1,100,000. To date the Company has expended
approximately $1,000,000 in addressing this issue.
The Company conducts a certain amount of its business overseas, mostly in
third-world countries. Normal business travel to these countries 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 those areas.
The Company believes it is diligently addressing the Year 2000 issues and that
it will satisfactorily identify and resolve critical and significant Y2K
problems in its operations and products. The assessment and remediation plan has
significantly reduced the level of uncertainty about the Y2K problem in the
Company's internal systems, its products, and its critical third-party
suppliers. It believes it has assigned adequate resources to its Y2K compliance
plan, and expects to complete substantially all phases during fiscal 1999, with
major completion milestones in the third and fourth quarters of fiscal 1999.
17
<PAGE>
TCI INTERNATIONAL, INC.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits: Exhibit 27.1-Financial Data Schedule
b. Reports on Form 8-K: None
No other applicable items.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TCI INTERNATIONAL, INC.
-----------------------
(Registrant)
/s/ Mary Ann W. Alcon
----------------------------------
Mary Ann W. Alcon
Chief Financial Officer
(Duly authorized officer of the registrant and
principal financial officer of the registrant)
August 13, 1999
- ---------------------------
Date
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 7,090
<SECURITIES> 1,271
<RECEIVABLES> 8,715
<ALLOWANCES> 0
<INVENTORY> 2,110
<CURRENT-ASSETS> 21,821
<PP&E> 8,732
<DEPRECIATION> 6,477
<TOTAL-ASSETS> 24,395
<CURRENT-LIABILITIES> 8,985
<BONDS> 0
0
0
<COMMON> 11,780
<OTHER-SE> 3,630
<TOTAL-LIABILITY-AND-EQUITY> 24,395
<SALES> 17,825
<TOTAL-REVENUES> 17,825
<CGS> 12,097
<TOTAL-COSTS> 12,097
<OTHER-EXPENSES> 7,549
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,821)
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,410
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,410)
<EPS-BASIC> (.44)
<EPS-DILUTED> (.44)
</TABLE>
