FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 1-4371
TECH-SYM CORPORATION
(Exact name of Registrant as specified in its charter)
NEVADA 74-1509818
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10500 WESTOFFICE DRIVE, SUITE 200, HOUSTON, TEXAS 77042
(Address of principal executive offices) Zip Code
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 785-7790
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, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON OUTSTANDING AT OCTOBER 29, 1999
- ---------------- -------------------------------
Common Stock, $.10 par value 6,035,731
<PAGE>
FORM 10-Q
TECH-SYM CORPORATION
TABLE OF CONTENTS
PAGE NO.
--------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet September 30, 1999
(unaudited) and December 31, 1998 ............................ 1
Consolidated Statement of Operations for the
quarter ended September 30, 1999 and 1998 (unaudited) ........ 2
Consolidated Statement of Operations for the nine
months ended September 30, 1999 and 1998 (unaudited) ......... 3
Consolidated Statement of Cash Flows for the nine
months ended September 30, 1999 and 1998(unaudited) .......... 4
Consolidated Statement of Changes in Shareholders'
Investment for the nine months ended September
30, 1999 amd 1998 (unaudited) ................................ 5
Notes to Consolidated Financial Statements ..................... 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 12-15
Part II. Other information
Item 6. Exhibits and Reports on Form 8-K .......................... 16
Signatures ........................................................... 16
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TECH-SYM CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PAR VALUE AND NUMBER OF SHARES)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .............................. $ 3,674 $ 3,417
Short-term investments ................................. 100 228
Receivables, net ....................................... 32,044 25,271
Unbilled revenue ....................................... 38,806 39,315
Inventories, net ....................................... 21,448 24,753
Net assets of discontinued operations (Note 2) ......... 61,527 86,806
Other .................................................. 1,105 6,235
--------- ---------
Total current assets .............................. 158,704 186,025
Property, plant and equipment, net ............................ 30,263 18,817
Long-term receivables, net .................................... 2,224
Long-term deferred tax asset ................................. 4,735
Other assets .................................................. 17,551 17,035
--------- ---------
Total assets ...................................... $ 211,253 $ 224,101
========= =========
LIABILITIES
Current liabilities
Notes payable .......................................... $ 20,999 $ 13,911
Current maturities of long-term debt ................... 1,237 1,178
Accounts payable ....................................... 9,709 8,152
Billings in excess of cost and estimated earnings
on uncompleted contracts ............................ 6,704 5,163
Other accrued liabilities .............................. 11,439 8,169
--------- ---------
Total current liabilities ......................... 50,088 36,573
Minority interest ............................................. (1,222)
Long-term debt ................................................ 1,641 2,335
Deferred taxes on income ...................................... 9,452 9,452
Other liabilities and deferred credits ........................ 8,433 8,010
--------- ---------
Total liabilities ................................. 68,392 56,370
SHAREHOLDERS' INVESTMENT
Preferred stock-authorized 2,000,000 shares,
without par value; none issued
Common stock-authorized 20,000,000 shares,
$.10 par value; issued 8,090,831 and 8,044,881, respectively 809 804
Additional capital ............................................ 41,985 41,361
Accumulated earnings .......................................... 133,999 157,739
Accumulated other comprehensive loss, net ..................... (3,631) (3,489)
Common stock held in treasury at cost
(2,055,100 and 1,980,400 shares) ........................... (30,301) (28,684)
--------- ---------
Total shareholders' investment .................... 142,861 167,731
--------- ---------
Total liabilities and
shareholders' investment ....................... $ 211,253 $ 224,101
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
1
<PAGE>
TECH-SYM CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FOR THE QUARTER
ENDED SEPTEMBER 30,
-----------------------
1999 1998
-------- --------
Revenue ............................................ $ 42,197 $ 35,038
Cost of revenue .................................... 28,845 25,742
-------- --------
Gross margin ................................ 13,352 9,296
Company-sponsored product development .............. 702 793
Selling, general and administrative expense ........ 11,161 7,168
Interest expense ................................... 464 169
Other expense (income), net ........................ 176 (186)
-------- --------
Income from continuing operations before income
taxes and minority interest ................ 849 1,352
Provision for income taxes ......................... 271 381
Minority interest .................................. (106)
-------- --------
Income from continuing operations ............. 684 971
(Loss) income from discontinued operations, net of
applicable income tax (benefit) expense and
minority interest (Note 2) ...................... (4,597) 1,957
Net (loss) income ............................. $ (3,913) $ 2,928
-------- --------
(Loss) earnings per common share
Continuing operations
Basic ...................................... $ .11 $ .16
Diluted .................................... .11 .16
Discontinued operations
Basic ...................................... (.76) .32
Diluted .................................... (.76) .32
Net (loss) income
Basic ...................................... (.65) .48
Diluted .................................... (.65) .48
Weighted average common shares outstanding
Basic ......................................... 6,030 6,072
Diluted ....................................... 6,030 6,161
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
TECH-SYM CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenue ......................................................... $ 115,524 $ 100,938
Cost of revenue ................................................. 83,808 72,295
--------- ---------
Gross margin ............................................. 31,716 28,643
Company-sponsored product development ........................... 2,575 2,119
Selling, general and administrative expense ..................... 27,560 22,364
Interest expense ................................................ 1,145 690
Other expense (income), net ..................................... 588 (909)
--------- ---------
(Loss) income from continuing operations before
income taxes and minority interest ...................... (152) 4,379
(Benefit) provision for income taxes ............................ (49) 1,445
Minority interest ............................................... (106)
--------- ---------
Income from continuing operations .......................... 3 2,934
(Loss) income from discontinued operations, net of
applicable income tax (benefit) expense and
minority interest (Note 2) ................................... (23,743) 7,471
--------- ---------
Net (loss) income .......................................... $ (23,740) $ 10,405
========= =========
(Loss) earnings per common share
Continuing operations
Basic ................................................... $ .00 $ .48
Diluted ................................................. .00 .48
Discontinued operations
Basic ................................................... (3.94) 1.23
Diluted ................................................. (3.94) 1.21
Net (loss) income
Basic ................................................... (3.94) 1.72
Diluted ................................................. (3.94) 1.69
Weighted average common shares outstanding
Basic ...................................................... 6,025 6,064
Diluted .................................................... 6,025 6,174
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
TECH-SYM CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net (loss) income ....................................................... $(23,740) $ 10,405
Loss (income) from discontinued operations ......................... 14,443 (7,471)
Provision for disposal of discontinued operation ................... 9,300
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operations
Provision for inventory write-down ................................. 4,000
Depreciation and amortization ...................................... 3,858 4,017
Minority interest .................................................. (106)
Loss on disposal of property, plant & equipment .................... 126 399
Change in operating assets and liabilities
Receivables ........................................................ (4,048) 3,291
Unbilled revenue ................................................... 509 2,974
Inventories ........................................................ (668) (2,212)
Other assets ....................................................... 341 152
Accounts payable and taxes on income ............................... 611 (4,037)
Billing in excess and other accrued liabilities .................... 5,067 (5,059)
Other liabilities and deferred credits ............................. 400 (1,005)
-------- --------
Net cash provided by operating activities of continuing operations 10,093 1,454
-------- --------
Cash flows from investing activities of continuing operations
Capital expenditures .................................................... (4,510) (3,912)
Capital expenditures on equipment manufactured for lease ................ (10,246)
Purchase of business, net of acquired cash .............................. (1,899)
Purchase of GeoScience common stock ..................................... (708)
Purchase of investment securities ....................................... (137)
Sale of investment securities ........................................... 265
Other ................................................................... 73 74
-------- --------
Net cash used for investing activities of continuing operations .. (17,162) (3,838)
-------- --------
Cash flows from financing activities of continuing operations
Net borrowings (payments) under bank line of credit agreements .......... 7,092 (10,164)
Payments on long-term debt .............................................. (1,235) (778)
Proceeds from long-term debt ............................................ 369 495
Proceeds from exercise of stock options ................................. 629 515
Acquisition of treasury shares .......................................... (1,617) (632)
-------- --------
Net cash provided by (used for) financing activities of
continuing operations .......................................... 5,238 (10,564)
-------- --------
Net cash provided by discontinued operations .............................. 2,088 8,773
-------- --------
Net increase (decrease) in cash and cash equivalents ...................... 257 (4,175)
Cash and cash equivalents at beginning of period .......................... 3,417 6,538
-------- --------
Cash and cash equivalents at end of period ................................ $ 3,674 $ 2,363
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
TECH-SYM CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' INVESTMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON STOCK ADDITIONAL ACCUMULATED COMPREHENSIVE TREASURY STOCK SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS LOSS SHARES AMOUNT INVESTMENT
-------- -------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 ........ 8,045 $ 804 $ 41,361 $157,739 $ (3,489) 1,980 $(28,684) $167,731
Comprehensive loss for 1999
Net loss .......................... (23,740)
Other comprehensive
loss, net of tax
Foreign currency
translation adjustments ..... (142)
Total comprehensive loss.... (23,882)
Acquisition of treasury shares ...... 75 (1,617) (1,617)
Issuance of common stock
for stock options ................ 46 5 624 629
-------- -------- -------- -------- -------- --------- -------- --------
Balance at September 30, 1999 ....... 8,091 $ 809 $ 41,985 $133,999 $ (3,631) 2,055 $(30,301) $142,861
======== ======== ======== ======== ======== ========= ======== ========
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON STOCK ADDITIONAL ACCUMULATED COMPREHENSIVE TREASURY STOCK SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) SHARES AMOUNT INVESTMENT
-------- -------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 ........ 7,995 $ 799 $ 40,677 $152,644 $ (3,277) 1,937 $(27,660) $163,183
Comprehensive income for 1998
Net income ........................ 10,405
Other comprehensive
income, net of tax
Foreign currency
translation adjustments ..... 1,043
Total comprehensive income.. 11,448
Acquisition of treasury shares ...... 25 (632) (632)
Issuance of common stock
for stock options ................ 39 4 511 515
--------- -------- -------- --------- -------- -------- -------- --------
Balance at September 30, 1998 ....... 8,034 $ 803 $ 41,188 $163,049 $ (2,234) 1,962 $(28,292) $174,514
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Tech-Sym
Corporation and its subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements and should be read in conjunction
with the financial statements and notes thereto appearing in the Company's Form
10-K for the year ended December 31, 1998.
In the opinion of the Company's management ("Management") all adjustments
necessary for a fair presentation of the results of operations for all periods
reported have been included. Such adjustments include normal recurring items, a
$1,000,000 charge in the third quarter to fund the benefits associated with the
dissolution of the Company's Executive Retirement Plan and Nonemployee Director
Retirement Plan, and a $4,000,000 charge in the second quarter for inventory
write-downs within the Communications segment (See Management's Discussion and
Analysis).
The consolidated statements of operations for the quarter and nine months
ended September 30, 1999 are not necessarily indicative of the results expected
for the full year ending December 31, 1999.
The consolidated statements have been restated to reflect the Company's
broadcast equipment, air monitoring products and real estate investment
subsidiaries, as well as its majority owned geoscientific business, GeoScience
Corporation, as discontinued operations in accordance with Accounting Principles
Board Opinion No. 30 (Note 2).
Certain prior year amounts have been reclassified to conform to the
current year presentation.
NOTE 2 - DISCONTINUED OPERATIONS
Effective June 30, 1998, the Company adopted a plan to sell its businesses
involved in real estate development (Lake Investment Company or "Lake"), the
manufacture of air monitoring products (Anarad, Inc. or "Anarad") and the
manufacture of radio and television broadcast equipment (Continental Electronics
Corporation, or "Continental"), and effective December 31, 1998, the Company
adopted a plan to sell its majority owned (80.067%) subsidiary, GeoScience
Corporation ("GeoScience"), which is involved in the manufacture of seismic
equipment used in the exploration for hydro-carbons. The effective dates of June
30, 1998 and December 31, 1998 are the respective measurement dates referred to
when discussing the results of operations of these businesses.
The presentation of the discontinued operations includes segregation of
the operating results in the Consolidated Statement of Operations for the
quarter and nine months ended September 30, 1999 and 1998. The net assets of the
discontinued operations are segregated at September 30, 1999 and December 31,
1998 in the Consolidated Balance Sheet and at September 30, 1999 and 1998 in the
Consolidated Statement of Cash Flows. Accordingly, the revenue, costs and
expenses, assets and liabilities and cash flows of these discontinued operations
have been excluded from the respective captions in the Consolidated Statement of
Operations, Consolidated Balance Sheet and Consolidated Statement of Cash Flows
and have been reported as "Income (loss) from discontinued operations, net of
applicable income taxes (benefits)", as "Net assets of discontinued operations"
and as "Net cash provided by discontinued operations" for all periods listed
above. The results of discontinued operations do not reflect any interest
expense or management fees allocated by the Company. Data presented for earnings
per share reflect the reclassification of the discontinued operations.
On November 18, 1998, the Company sold Lake. On March 15, 1999, the
Company sold substantially all of the assets of Anarad. The results of
operations and disposition of Lake and Anarad were reflected in the 1998
financial statements. During the second quarter of 1999, the Company did not
receive scheduled payments on the $3,100,000 note receivable from Consumer Loan
Portfolios, Inc., for the sale of Lake. Due to the non-payment of the note
receivable, the Company has issued a demand for arbitration and statement of
claim as provided in the purchase agreement. The Company did not receive any
payments on the note receivable during the third quarter.
6
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Since the measurement date, the Company has marketed its radio and
television broadcast equipment business, Continental. Several potential
purchasers have conducted initial due diligence investigations. None of the
potential buyers have made a binding offer for the business to date. Since the
Company announced its intent to divest the broadcast equipment business,
Continental has incurred significant operational losses, mainly generated by its
German operation. Despite recent financial and operational improvements under
new management, the Company believes that continued improvements in both
operational results and market acceptance of digital products are necessary
before prospective buyers will have a strong interest in acquiring the business.
Given these facts, during the quarter ended June 30, 1999, the Company
recognized previously deferred after-tax losses of $9,846,000 and a $9,300,000
after-tax provision for losses anticipated to be incurred until and upon
completion of the disposition of the broadcast equipment business. While still
exploring opportunities to sell the entire broadcast equipment business, the
Company has decided to consolidate the German operations into the operations in
Dallas, Texas. All current contracts in process at the German operation will be
completed prior to the consolidation and customer support thereafter will be
provided by the U.S. operation.
In December 1998, the Boards of Directors of the Company and GeoScience
committed to a plan to seek a strategic merger partner for GeoScience. On
January 18, 1999, the Company and GeoScience signed an agreement to merge
GeoScience with a third party, subject to stockholder and regulatory approval.
The Company, GeoScience and the third party subsequently terminated the proposed
merger. During the quarter ended March 31, 1999, the third party paid GeoScience
$3,000,000 in connection with such termination.
In October 1999, the Company agreed to tender its shares in GeoScience to
Compagnie Generale De Geophysique (CGG) pursuant to the tender offer related to
the merger of GeoScience and Sercel, Inc., a wholly owned subsidiary of CGG.
Under the terms of the agreement, the Company will receive $53,600,000 in cash
for its 7,995,000 shares, or $6.71 per share, and CGG will assume GeoScience's
debt obligations of approximately $35,000,000 at the date of the agreement,
eighty percent of which is guaranteed by the Company. The merger agreement is
subject to several conditions including the successful completion of CGG's share
capital increase that was announced on September 9, 1999. Closing is targeted by
year-end, but may be extended to March 31, 2000, under certain conditions. While
the terms of the merger would result in a gain on the transaction, that gain
will be insufficient to offset operating losses that had been previously
deferred on the anticipation of a larger gain. As a result, the Company
recognized an after-tax loss of $4,597,000 in the third quarter of 1999, related
to the expected results from the anticipated disposition of GeoScience.
Revenue related to discontinued operations for the quarter ended September
30, 1999 was $11,107,000 for GeoScience and $11,080,000 for Continental. Revenue
related to discontinued operations for the nine months ended September 30, 1999
was $68,824,000, $29,334,000 and $348,000 for GeoScience, Continental and
Anarad, respectively.
Revenue related to discontinued operations for the quarter ended September
30, 1998 was $24,666,000, $9,043,000, $458,000 and $590,000 for GeoScience,
Continental, Anarad and Lake, respectively. Income before income taxes for the
quarter ended September 30, 1998 was $2,671,000 for GeoScience and $76,000 for
Lake, while Continental and Anarad experienced losses of $2,006,000 and
$317,000, respectively. Net income for the discontinued operations for the
quarter ended September 30, 1998 was $2,276,000 and $76,000 for GeoScience and
Lake, respectively, and net losses for the same period were $1,501,000 and
$202,000 for Continental and Anarad, respectively. All income/loss amounts
exclude Tech-Sym Corporate overhead allocations.
The revenue related to discontinued operations for the nine months ended
September 30, 1998 was $91,178,000, $26,683,000, $2,219,000 and $1,366,000 for
GeoScience, Continental, Anarad and Lake, respectively. Income before income
taxes for the nine months ended September 30, 1998 was $11,510,000 for
GeoScience, while Continental, Anarad and Lake experienced losses of $4,646,000,
$594,000 and $84,000, respectively. Net income for the discontinued operations
for the nine months ended September 30, 1998 was $11,562,000 for GeoScience and
net losses for the same period were $3,270,000, $688,000 and $331,000 for
Continental, Anarad and Lake, respectively. All income/loss amounts exclude
Tech-Sym Corporate overhead allocations.
7
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
For financial reporting purposes, the assets and liabilities of the
discontinued operations at September 30, 1999 have been classified in the
consolidated balance sheet as net assets of discontinued operations and consist
of the following (in thousands):
GeoScience(1) Continental Total
------------ ----------- ---------
Current assets................ $93,116 $22,946 $116,062
Total assets.................. 131,897 30,224 162,121
Current liabilities........... 48,216 25,068 73,284
Total liabilities............. 68,518 32,076 100,594
Net assets of discontinued
operations.................. 63,379 (1,852) 61,527
(1) GeoScience's net assets presented in this table reflect Tech-Sym's
80.067% ownership of GeoScience, including minority interest liability and
deferred expense, goodwill and deferred amortization expense, intercompany
payable and additional income tax expense.
NOTE 3 - ACQUISITIONS
In July 1999, the Company acquired 51% of Crosslink, Inc., a wireless
communications product and services business for $2,000,000 cash. Crosslink's
third quarter results are incorporated in the Company's Consolidated Statement
of Operations for the quarter and nine months ended September 30, 1999 and
Consolidated Statement of Cash Flows for the nine months ended September 30,
1999. Crosslink's assets and liabilities are included in the Company's
Consolidated Balance Sheet as of September 30, 1999.
In August 1999, the Company purchased 95,000 shares of GeoScience
Corporation on the open market at an average price of $7.41. The purchase
increased the Company's ownership of GeoScience from 79.12% to 80.067%, which
should enable the Company to include GeoScience in its consolidated Federal Tax
filings going forward.
NOTE 4 - INVENTORIES
Inventories, which consist principally of electronic components, of which
$254,000 at September 30, 1999 is subject to lease, are summarized as follows
(in thousands):
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
Raw materials......... $16,715 $16,686
Work in progress...... 7,849 7,514
Finished goods........ 2,988 2,430
---------- ----------
27,552 26,630
Less reserve.......... (6,104) (1,877)
---------- ----------
$ 21,448 $ 24,753
========== ==========
NOTE 5 - PER SHARE DATA
Basic per share amounts are computed based on the average number of common
shares outstanding. Diluted per share amounts reflect the increase in average
common shares outstanding that would result from the exercise of outstanding
stock options computed using the treasury stock method. Stock options are the
only potentially dilutive shares the Company has outstanding. Due to the
Company's losses, diluted earnings per share presented on the Consolidated
Statement of Operations for the quarter and nine months ended September 30,
1999, do not reflect any effect from outstanding stock options because to do so
would have been anti-dilutive. Outstanding stock options for the quarter and
nine months ended September 30, 1999 were 953,440. The Company had 417,900
outstanding options that were anti-dilutive and were excluded from the
computation of diluted earnings per share for the quarter and nine months ended
September 30, 1998.
8
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During the second quarter of 1999, the Company repurchased 71,700 shares
of its common stock under a previously approved repurchase program. Effective
May 11, 1999, the Company's Board of Directors authorized the Company to
repurchase 250,000 shares of its common stock and rescinded the 6,100 shares
remaining on the previous program. Additionally, the Company purchased 3,000
shares of its common stock under the new repurchase plan during the second
quarter of 1999. The Company did not purchase any common stock in the third
quarter of 1999.
NOTE 6 - RECENT PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137 ("FAS 137") ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which delayed implementation and the
effective date of FAS 133 until after June 15, 2000.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("FAS 133") ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. FAS 133 is effective for fiscal years
beginning after June 15, 1999 and establishes accounting and reporting standards
for derivative instruments. The Company has historically not engaged in
significant derivative instrument activity. Adoption of FAS 133 is not expected
to have a material effect on the Company's financial position or operational
results.
NOTE 7 - SEGMENT INFORMATION
The Company manages its business primarily on a product basis. The
Company's reportable segments are Communications, Defense Systems and Weather
Information Systems. The reportable segments provide products as described in
the Company's Form 10-K for the year ended December 31, 1998. The accounting
policies of the segments are those described in Note 1 to the Notes to the
Consolidated Financial Statements included in that Form 10-K.
The Company evaluates the performance of its segments and allocates
resources to them based on revenue and income before taxes; however, there is a
charge to allocate corporate centralized general and administrative costs to
each of its operating segments.
The tables below present certain information regarding the continuing
operations for the quarter ended September 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30, 1999
- -------------------------------- WEATHER
COMMUNI- DEFENSE INFORMATION RECONCILING
CATIONS SYSTEMS SYSTEMS OTHER ITEMS TOTAL
-------- ------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue from unaffiliated customers $ 19,201 $ 13,980 $ 7,604 $ 1,412 $ $ 42,197
Operating income (loss) ........... (536) 1,471 3,091 (217) 3,809
Corporate centralized general and
administrative expenses......... 300 325 95 1,600(1) 2,320
Interest expense .................. 158 29 3 3 271 464
Other (income) and expense, net ... 590 (29) (20) (3) (362) 176
Income (loss) before income
taxes (benefits) ............... (1,584)(2) 1,146(2) 3,013(2) (217) (1,509) 849
Depreciation and amortization ..... 732 575 60 25 55(3) 1,447
Capital expenditures .............. 925 10,342(4) 309 34 (3) 11,607
</TABLE>
9
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30, 1998
- -------------------------------- WEATHER
COMMUNI- DEFENSE INFORMATION RECONCILING
CATION SYSTEMS SYSTEMS ITEMS TOTAL
-------- ------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Revenue from unaffiliated customers $ 16,052 $ 15,648 $ 3,338 $ $ 35,038
Operating income .................. 731 787 858 2,376
Corporate centralized general and
administrative expenses......... 300 261 56 424(1) 1,041
Interest expense .................. 136 4 29 169
Other (income) and expense, net ... 280 (178) (98) (190) (186)
Income (loss) before income
taxes (benefits) ............... 15(2) 700(2) 900(2) (263) 1,352
Depreciation and amortization ..... 530 324 44 57(3) 955
Capital expenditures .............. 637 278 90 38 1,043
</TABLE>
Notes for the quarters ended September 30, 1999 and 1998.
(1) Corporate expenses not allocated to subsidiaries for financial reporting.
(2) Includes the allocated corporate expenses.
(3) Corporate depreciation and amortization, which is included in the
allocated and unallocated corporate expenses above.
(4) Includes expenditures of $10,246,000 for equipment manufactured for lease.
The tables below present certain information regarding the continuing
operations for the nine months ended September 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
- ------------------------------------ WEATHER
COMMUNI- DEFENSE INFORMATION RECONCILING
CATIONS SYSTEMS SYSTEMS OTHER ITEMS TOTAL
-------- --------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue from unaffiliated customers $ 58,564 $ 38,673 $ 16,875 $ 1,412 $ $ 115,524
Operating income (loss) ........... (2,422) 4,008 5,458 (217) 6,827
Corporate centralized general and
administrative expenses......... 1,000 976 245 3,025(1) 5,246
Interest expense .................. 467 60 3 3 612 1,145
Other (income) and expense, net ... 2,084 (64) (180) (3) (1,249) 588
Income (loss) before income
taxes (benefits) ............... (5,973)(2) 3,036(2) 5,390(2) (217) (2,388) (152)
Depreciation and amortization ..... 2,251 1,237 181 25 164(3) 3,858
Capital expenditures .............. 2,915 11,042(4) 726 34 39 14,756
</TABLE>
10
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
- ------------------------------------ WEATHER
COMMUNI- DEFENSE INFORMATION RECONCILING
CATIONS SYSTEMS SYSTEMS ITEMS TOTAL
-------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue from unaffiliated customers $ 48,499 $ 41,643 $ 10,796 $ $ 100,938
Operating income .................. 1,150 2,994 2,751 6,895
Corporate centralized general and
administrative expenses......... 900 787 169 879(1) 2,735
Interest expense .................. 466 5 219 609
Other (income) and expense, net ... 948 (520) (610) (727) (909)
Income (loss) before income
taxes (benefits) ............... (1,164)(2) 2,722(2) 3,192(2) (371) 4,379
Depreciation and amortization ..... 2,164 994 233 155(3) 3,546
Capital expenditures .............. 2,682 511 175 49 3,417
</TABLE>
Notes for the nine months ended September 30, 1999 and 1998.
(1) Corporate expenses not allocated to subsidiaries for financial reporting.
(2) Includes the allocated corporate expenses.
(3) Corporate depreciation and amortization, which is included in the allocated
and unallocated corporate expenses above.
(4) Includes capital expenditures of $10,246,000 for equipment manufactured
for lease.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As discussed in Note 2 to the Notes to Consolidated Financial Statements,
the Company has discontinued certain businesses, therefore Management's
discussion and analysis of financial condition and results of operations below
relates only to the Company's continuing businesses.
In July 1999, the Company acquired 51% of Crosslink, Inc., a wireless
communications product and services business for $2,000,000 cash. Crosslink's
third quarter results are incorporated in the Company's Consolidated Statement
of Operations for the quarter and nine months ended September 30, 1999 and
Consolidated Statement of Cash Flows for the nine months ended September 30,
1999. Crosslink's assets and liabilities are included in the Company's
Consolidated Balance Sheet as of September 30, 1999.
In August 1999, the Company purchased 95,000 shares of GeoScience
Corporation on the open market at an average price of $7.41. The purchase
increased the Company's ownership of GeoScience from 79.12% to 80.067%, which
should enable the Company to include GeoScience in its consolidated Federal Tax
filings going forward.
In October 1999, the Company agreed to tender its shares in GeoScience to
Compagnie Generale De Geophysique (CGG) pursuant to the tender offer related to
the merger of GeoScience and Sercel, Inc., a wholly owned subsidiary of CGG.
Based upon the terms of the agreement, as more fully discussed in Note 2 of the
Notes to Consolidated Financial Statements, the Company recognized an after-tax
loss of $4,597,000 in the third quarter of 1999 related to the expected results
from the anticipated disposition of GeoScience.
RESULTS OF OPERATIONS - QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO THE QUARTER
ENDED SEPTEMBER 30, 1998
Revenue for the quarter ended September 30, 1999 increased $7,159,000 or
20% to $42,197,000 compared to $35,038,000 for the quarter ended September 30,
1998. The increase occurred in the Communications and Weather Information
Systems segments, where the increase was $3,149,000 or 20% and $4,266,000 or
128%, respectively, over the prior year quarter. The revenue increase in the
Communications segment was due primarily to increased customer demand for
ceramics and ferrite products used in the wireless communications industry
resulting from improved market conditions. The revenue increase in the Weather
Information Systems segment was primarily a result of completing several weather
radar systems. The Defense Systems segment's revenue decreased $1,668,000 as
compared to the same period in 1998, as certain jobs that were in full
production in the prior year quarter were completed prior to the current
quarter. The backlog of the Defense Systems segment increased $25,540,000 from
the prior year quarter, with a number of new orders in the start up or early
production phase.
Consolidated gross margin as a percentage of sales for the quarter ended
September 30, 1999 increased by 5% to 32% from 27% for the comparative period in
1998, primarily as a result of the large revenue increase in the Weather
Information Systems segment. The manufacturing efficiencies derived from the
increased output resulted in a 12% gross margin improvement in that business
segment. The gross margin percentage for the Communications segment decreased to
21% for the current quarter as compared to 27% in the prior year quarter as a
result of significant losses related to long-term non-commercial engineering
projects. The gross margin percentage increased to 28% from 20% in the Defense
Systems segment primarily reflecting the mix and stage of production of jobs in
process between the two reporting periods.
Company-sponsored product development expenditures for the current quarter
were $91,000 less than in the quarter ended September 30, 1998. Expenditures
within the Communications and the Defense Systems segments decreased slightly,
while expenditures increased slightly within the Weather Information Systems
segment from the comparative period.
Selling, general and administrative expenses increased significantly
between the two reporting periods, primarily as a result of the one-time charge
of approximately $1,000,000 at the Company's headquarters in the current period
to fund the benefits associated with the dissolution of the Company's Executive
Retirement Plan and Nonemployee Director Retirement Plan and the inclusion of
$617,000 of Crosslink's general and administrative expenses. Expenses within the
Weather Information System were significantly higher, $889,000, due to selling
commissions and incentive bonus accruals related to the increased revenue and
profitability of that business segment. Expenses within the Communications
segment were significantly higher, $1,068,000, due to increased
12
<PAGE>
commissions relating to increased revenue and increased general and
administrative expenses relating to the increase in staffing associated with
restructuring that began in the fourth quarter of 1998. Selling, general and
administrative expenses for the Defense Systems segment increased slightly,
$140,000, primarily due to increased proposal activity in the current quarter
compared to the prior year quarter.
Interest expense for the current quarter increased $295,000 to $464,000
from $169,000 in the prior year quarter primarily due to higher interest rates
and greater borrowings on the Company's credit facilities during the current
period versus the prior year period. Other expense was $176,000 for the current
quarter compared to other income of $186,000 for the quarter ended September 30,
1998. The $362,000 increase in expense primarily reflects the lower earnings
from our equity investment Scientific Research Corporation, due to its current
development of a new business unit, Colocation Technologies. The Communications
segment incurred unfavorable currency fluctuations and additional costs
associated with the shut down and closeout of the San Clemente, California
facility and the movement of its residual operations to the Tampa, Florida
facility. In addition, losses were recognized resulting from the sale of assets
within the Executive Retirement and Nonemployee Director Retirement Trust to
fund payments under those plans.
The Company's effective tax rate was 32% for 1999 as compared to the 33%
rate used for the third quarter in 1998 due to anticipated tax benefits
associated with research and experimentation efforts and increased activity
within our Foreign Sales Corporation.
Continuing operations for the quarter ended September 30, 1999 resulted in
income of $684,000 or $.11 per diluted share as compared to income of $971,000
or $.16 per diluted share for the quarter ended September 30, 1998. The results
of the discontinued operations included the recognition of an after-tax loss of
$4,597,000 or $.76 per diluted share in the quarter ended September 30, 1999,
due to the anticipated results of the disposition of the Geoscientific segment
as previously discussed, whereas the period ended September 30, 1998 included
net income of $1,957,000 or $.32 per diluted share relating to this segment.
Net loss for the quarter ended September 30, 1999 was $3,913,000 or $.65
per diluted share as compared to net income of $2,928,000 or $.48 per diluted
share for the quarter ended September 30, 1998, reflecting the net effect of the
items discussed above.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenue for the nine months ended September 30, 1999 increased $14,586,000
or 14% to $115,524,000 compared to $100,938,000 for the nine months ended
September 30, 1998. The increase occurred primarily in the Communications
segment, where the increase was $10,065,000 or 21%, over the prior year period.
The increase was due to major antenna programs under contract that were not in
process in the first half of 1998 and increased demand for ceramic and ferrite
products reflecting the improving market conditions in the wireless
communications industry. The Weather Information Systems segment's revenue
increased $6,079,000 or 56% over the prior year period as a result of completion
of several weather radar systems during the period. The Defense Systems
segment's revenue decreased $2,970,000 or 7% as certain jobs that were in full
production in the prior year period had been completed prior to the current
period.
Consolidated gross margin as a percentage of sales for the nine months
ended September 30, 1999 decreased to 27% from 28% for the comparative period in
1998 primarily as a result of the $4,000,000 charge for inventory reserves
within the Communications segment. Without this charge, the consolidated gross
margin percentage would have improved by 3% over the prior year period. The
gross margin percentage for the Communications segment was unchanged from the
prior year period without this additional charge. The gross margin percentage
increased to 28% from 24% for the Defense Systems segment and to 58% from 54% in
the Weather Information Systems segment, primarily reflecting the mix and stage
of production of jobs in process at both segments between the two reporting
periods.
Company-sponsored product development expenditures for the current nine
months were $456,000 greater than the nine months ended September 30, 1998.
Expenditures within the Communications segment were essentially flat between the
two periods, while expenditures increased slightly at both the Weather
Information Systems and Defense Systems segments.
13
<PAGE>
Selling, general and administrative expenses increased $5,196,000 or 23%
to $27,560,000 for the nine months ended September 30, 1999 compared to the same
period in the prior year. Approximately $4,000,000 of the increase occurred in
the third quarter of 1999 and was discussed in the quarter to quarter
comparative above. Additionally, general and administrative expenses within the
Communications segment were greater primarily as a result of additional costs
due to new staffing and employee severance costs related to the restructuring
efforts that began in the fourth quarter of 1998.
Interest expense for the current nine month period increased $455,000 to
$1,145,000 from $690,000 in the prior year period due to higher interest rates
and greater borrowing on the Company's credit facilities. Additional borrowings
were needed to support working capital requirements and to fund capital
expenditures. Other expense increased $1,497,000 to $588,000 for the current
nine months compared to other income of $909,000 for the nine months ended
September 30, 1998. The current nine months included items discussed in the
quarterly comparative above, as well as the costs associated with the shut down
of the Communications segment's San Clemente, California facility as discussed
in the Results of Operations in the 10-Q for the Quarter Ended June 30, 1999.
The nine months ended September 30, 1998 was favorably impacted by the $325,000
payment received by the Weather Information Systems segment regarding the
settlement of a dispute.
The Company's effective tax rate was 32% for 1999 as compared to the 33%
rate used for the nine months in 1998 due to anticipated tax benefits associated
with research and experimentation efforts and increased activity within our
Foreign Sales Corporation.
Continuing operations for the nine months ended September 30, 1999
resulted in income of $3,000 or $.00 per diluted share as compared to income of
$2,934,000 or $.48 per diluted share for the nine months ended September 30,
1998.
The results of the discontinued air monitoring business for the nine
months ended September 30, 1999 were recognized in 1998. The results of the
discontinued operations for the current nine month period included recognition,
in the second quarter of 1999, of previously deferred after-tax losses of
$9,846,000 and an after-tax provision of $9,300,000 for anticipated additional
losses in operations and disposal for the discontinued broadcast equipment
manufacturing business and an after-tax loss of $4,597,000 recognized in the
quarter ended September 30, 1999, due to the anticipated results of the
disposition of the discontinued Geoscientific segment. The period ended
September 30, 1998 included net income of $7,471,000 or $1.21 per diluted share
relating to the discontinued GeoScience business.
Net loss for the nine months ended September 30, 1999 was $23,740,000 or
$3.94 per diluted share as compared to net income of $10,405,000 or $1.69 per
diluted share for the nine months ended September 30, 1998, reflecting the net
effect of the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
During the current period the Company satisfied its working capital and
capital expenditure requirements through borrowings on its line of credit
facilities and cash generated by operations. At September 30, 1999, the
Company's working capital balance, net of assets of discontinued operations, was
$47,089,000, compared to $62,646,000 at December 31, 1998, reflecting the
Company's $4,000,000 inventory write-down within the Communications segment, an
increase in accounts receivable and additional short-term borrowings. At
September 30, 1999, the Company had a working capital ratio of 1.94 to 1.0 and
debt to total capitalization of 14%. Purchases of property, plant and equipment
for continuing operations totaled $14,756,000, including $10,246,000 relating to
the capitalization of the costs associated with equipment manufactured for
lease, for the nine months ended September 30, 1999, compared to $3,912,000 for
the same period in the prior year. At September 30, 1999, the Company's
continuing operations had short-term line of credit facilities aggregating
$25,850,000 of which $4,805,000 was available for additional short-term
borrowings.
During the third quarter of 1999, the Company negotiated extensions of its
credit facilities with Wells Fargo Bank and Bank of America from September 13,
1999 to October 31, 1999 and with First Union Bank from September 13, 1999 to
November 13, 1999. Effective October 29, 1999, the Company, Wells Fargo Bank and
Bank of America entered into a new consolidated credit facility for the same
total amount to replace the individual credit facility with each of those banks.
The individual credit facility between Continental Electronics Corporation and
Bank of America was consolidated at the Tech-Sym Corporation level, with
Continental Electronics Corporation
14
<PAGE>
guaranteeing the new Tech-Sym facility. The new credit facility expires on March
31, 2000. However, if certain financial conditions are not met by December 15,
1999 and December 31, 1999, the facility may be terminated by the banks. On
November 12, 1999,the Company negotiated an extension through December 15,
1999 of its credit facility with First Union Bank with a reduction of $3,000,000
in the available credit facility.
YEAR 2000 COMPLIANCE
As previously reported the Company is continuing its efforts to insure Y2K
software failures, internally or externally, will not have an adverse effect on
its financial position or results of operations. Cross-functional project teams,
established during 1998 at each subsidiary, continue to review and assess the
various factors surrounding the Y2K issues. The Company estimates the total cost
of Y2K compliance activities for both continuing and discontinued operations
will be less than $1,200,000 and the amount expended to date is approximately
$900,000.
The Company expects to complete its Y2K project during 1999. Based on
available information, the Company believes that it has addressed all potential
areas of exposure and believes no material exposure to significant business
interruption exists as a result of Y2K compliance issues. Accordingly, the
Company has not adopted a formal contingency plan in the event its Y2K project
is not completed in a timely manner. These costs and the timing in which the
Company plans to complete its Y2K modification and testing processes are based
on management's best estimates. However, there can be no assurance that the
Company will identify and remediate all significant Y2K problems on a timely
basis, that remedial efforts will not involve significant time and expense or
that such problems will not have a material adverse effect on the Company's
business, results of operations or financial position.
Forward-looking statements in this document are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that all forward-looking statements involve risks and
uncertainties, including, without limitation, risks associated with the
uncertainty of market acceptance of the Company's products, limited number of
customers, as well as risks of downturns in economic conditions generally, risks
associated with competition and competitive pricing pressures, risks associated
with the completion of the merger agreement, and other risks detailed in the
Company's filings with the Securities and Exchange Commission.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) There are no exhibits to this report except for Exhibit 27 -
Financial Data Schedule which is deemed not to be filed for purposes
of liability under the federal securities laws.
(b) Reports on Form 8-K.
Current report on Form 8-K dated July 14, 1999 Item 5. Other Events,
reported the information set forth in the press release dated July
14, 1999.
Current report on Form 8-K dated July 19, 1999 Item 5. Other Events,
reported the information set forth in the press release dated July
19, 1999.
Current report on Form 8-K dated August 31, 1999 Item 5. Other
Events, reported the information set forth in the press release
dated August 31, 1999.
No financial statements were filed as a part of this report.
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.
TECH-SYM CORPORATION
Registrant
Date: November 12, 1999 /s/ J. MICHAEL CAMP
J. Michael Camp, President
and Chief Executive Officer
Date: November 12, 1999 /s/ PAUL L. HARP
Paul L. Harp, Treasurer and Controller
(principal accounting officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM TECH-SYM CORPORATION FORM 10-Q THIRD QUARTER 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,674
<SECURITIES> 100
<RECEIVABLES> 32,251
<ALLOWANCES> 207
<INVENTORY> 21,448
<CURRENT-ASSETS> 158,704
<PP&E> 84,276
<DEPRECIATION> 54,013
<TOTAL-ASSETS> 211,253
<CURRENT-LIABILITIES> 50,088
<BONDS> 0
0
0
<COMMON> 809
<OTHER-SE> 142,052
<TOTAL-LIABILITY-AND-EQUITY> 211,253
<SALES> 115,524
<TOTAL-REVENUES> 115,524
<CGS> 83,808
<TOTAL-COSTS> 113,943
<OTHER-EXPENSES> 588
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,145
<INCOME-PRETAX> (152)
<INCOME-TAX> (49)
<INCOME-CONTINUING> 3
<DISCONTINUED> (23,743)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,740)
<EPS-BASIC> (3.94)
<EPS-DILUTED> (3.94)
</TABLE>
