ITEM 1 - BUSINESS
GENERAL Except for historical information contained herein, the matters discussed in this report contain forward-looking statements that involve risks and uncertainties that could cause results to differ materially.
TCI International, Inc. is a holding company comprised of two product groups. The broadcast group offers broad-bandwidth antenna and transmission feeder solutions for the FM and TV broadcast markets, and high power short wave and MF broadcasting applications. The signal processing group provides direction finding, spectrum monitoring, and specialized communication receiver and transmitter products to both commercial and defense-oriented customers.
PRODUCTS AND SERVICES The Company manufactures specialized transmission and receiving equipment and offers these items for sale as separate products or as part of larger systems comprised of various components. The Company's equipment serves frequency ranges of 0.5 to 3000 MHz and falls into two core product lines: Broadcasting Products, and Signal Processing Products. The Company's products are sold primarily to civilian and commercial entities as well as U.S. and foreign government agencies.
The Company also installs the equipment it manufactures, often on a turnkey basis. The Company's expert design and manufacturing capabilities, combined with its ability to manage large projects and installation activities both in the U.S. and in foreign countries, gives it a competitive advantage.
BROADCASTING PRODUCTS The Company designs and manufactures antenna systems and accessory items that cover the frequency range of 0.5 to 870 MHz. Most of the Company's products are used for TV and AM broadcasting, although lower-power versions of its products in the 2 to 30 MHz range are used for high frequency (HF) communications by military and commercial organizations. The Company applies its proprietary electromagnetic and structural software to produce antenna systems with optimal radiation pattern shapes, bandwidth, power handling capability, and reduced loads on support towers. The Company's structural design expertise provides a competitive advantage in situations when antenna systems must be optimized or customized to meet a customer's unique structural requirements.
Many of the Company's products must be installed and then integrated with other parts of a system. The Company has successfully completed numerous installation and integration projects in both domestic and foreign locations. The Company has a unique combination of engineering, manufacturing, installation, integration, and project management skills that can be used to its competitive advantage in many bidding situations.
Digital television (DTV) broadcasting presents opportunities for the Company in both the domestic and foreign markets. Within the United States, the transition to DTV, mandated by the Federal Communications Commission in April 1997, requires all of the approximately 1600 domestic TV stations to install digital transmission facilities within the next two to six years. This represents a large potential market for the Company's antenna and transmission line products, particularly over the next several years as the pace of the DTV conversion process accelerates. One of the major problems in the conversion to DTV is the shortage of suitable tower space on which to install the new antennas. Many existing towers are already at their maximum capacity and cannot accept new antennas. New towers are difficult to build because of the lack of optimum locations and/or stringent environmental rules that prohibit or severely limit new construction.
To help solve these problems the Company invented and received a patent in November 2000 for a DTV ultra-high-frequency (UHF) transmitting antenna. The antenna is a broad-bandwidth slot antenna that can transmit on several channels simultaneously but imposes a relatively small load on the tower. In many situations, a broadcaster can replace an existing antenna with the Company's new product without having to strengthen the tower and yet be able to broadcast both analog and digital TV signals simultaneously. The Company's antenna also permits broadcasters to combine transmissions onto the antenna thus freeing up space on the tower that can be leased to other broadcasting or communication services. The Company has made several significant sales of the product and expects to make more such sales in the upcoming fiscal year.
In addition to this new antenna product, the Company has invented and applied for a patent for a broad-bandwidth coaxial transmission line that will permit the Company to supply the major elements of a DTV transmitting antenna system.
The Company's ability to supply, install and integrate new DTV antenna systems as well as provide complete turnkey solutions is proving to be attractive to many customers. Modern TV stations operate with very few engineers who do not have the time and/or specialized skills to perform the entire DTV conversion process themselves. By undertaking many of the project management and installation activities, TCI not only increases the size of each sale but also provides valuable services to broadcasters. Typical sale prices of individual TV antennas range between $25,000 to $250,000, with turnkey systems ranging between $100,000 and $2,000,000.
Foreign markets also present significant opportunities for sales of TV antennas and systems in countries that are privatizing their broadcasting sectors and/or introducing digital television. Unlike the United States, most countries have lacked a private broadcasting sector. Broadcasting has been a monopoly of governmental or government-owned organizations. This situation is changing rapidly with the world-wide trend to privatize national telecommunications organizations. In numerous countries, private entrepreneurs are obtaining licenses to establish broadcasting stations that operate for profit. This is a potentially large market for the Company's products and systems engineering expertise. These projects are usually much larger in scope and dollar value than the sale of individual antenna systems.
The Company's medium frequency (MF) (0.5 to 1.7 MHz) or HF (2 to 30 MHz) broadcasting antenna systems are typically large structures consisting of towers up to several hundred feet high combined with complex arrangements of wire cables. Antennas of this type operate at high power levels ranging from 1 kW up to 8000 kW. The Company also manufactures RF switches, transmission lines, and impedance transformers that are used in conjunction with its antennas.
MF and HF broadcasting antennas are sold either directly to broadcasters or to transmitter manufacturers for integration into complete systems. Typical system orders range in price between $100,000 and $10,000,000. Although the market for HF and MF antenna systems has been declining since the end of the Cold War, there are occasional bursts of activity as both civilian and military organizations upgrade their high power transmission facilities.
The Company expects that with the advent of digital AM broadcasting in the future it will see a steady business in HF and MF broadcasting antennas. Digital broadcasting provides sound quality similar to that produced by compact discs, which is a great improvement over the sound presently provided. This improvement in quality is likely to result in increased construction of digital HF and MF broadcasting facilities, which will provide excellent radio coverage of large audience areas at relatively low cost. The Company is familiar with the advances in digital broadcasting because it is a founding member of the Digital Radio Mondiale (DRM) consortium that has developed and is promoting a world-wide standard for HF and MF digital broadcasting.
HF communication antennas are usually employed in civil and military shore-ship and land-air communications systems. HF communication has recently been applied to create inexpensive systems that track trucks and provide remote messaging over huge geographic areas without requiring access to cellular telephone or satellite communications networks. The Company's HF antennas are being used as the backbone of a major system that was launched in the United States and is expected to be launched in other countries. HF communications antennas typically sell in the $15,000 to $100,000 range, with large systems of such antennas often selling for $1 to $3 million. This past fiscal year the Company won a contract for a major HF communications antenna system in Australia and expects to win several substantial orders in Europe and the Middle East in the upcoming fiscal year.
SIGNAL PROCESSING PRODUCTS The Company's signal processing products are comprised of spectrum management, direction finding, signal collection, and specialized communications equipment that are sold primarily to domestic and foreign military and governmental customers. The Company's core products consist of receivers and transmitters, DSP-based direction finding processors, and specialized application software. The Company manufactures products that cover the frequency range from 0.01 to 3000 MHz.
Spectrum management systems are required by all countries in order to manage and monitor their electromagnetic spectrum. The growth in this market has been fueled by the rapid expansion in the number of users of cellular telephones, pagers, and other personal communications devices, and sale of portions of the spectrum to commercial telecommunications organizations. These products comprise specialized application and database software and proprietary monitoring, measurement and DF hardware that operate from 10 kHz to 3 GHz. Most of the requirements for spectrum management systems are driven by the world-wide trend towards privatization of telecommunications services. Since the privatized spectrum has usually been purchased at great expense and is expected to generate revenues, the private telecommunications companies expect their spectrum to be protected from interference and unlicensed usage. The Company's spectrum management systems give regulatory authorities the tools to maintain sufficient order and discipline in the spectrum so that modern radio and wireless services can function. In addition, spectrum management systems are used to a) issue frequency assignments, b) administer the issuing of licenses and collection of fines from users who violate the regulations, c) manage the databases of users, licenses, and violations, d) monitor the spectrum, including identifying, measuring, and locating signals, and e) prepare reports. Traditionally, these functions have been performed manually using stand-alone receivers, measurement equipment, and numerous forms filled out by hand. The Company provides turn-key systems that perform all tasks in an automated, integrated, seamless operation with a minimum of operator intervention. These systems use Company products and other commercial off-the-shelf equipment that the Company integrates. The Company's systems are based on modular architecture that allows special systems to be constructed from a common set of building blocks.
Spectrum management systems can vary in complexity from a single site, single position station to a large scale multi-site network including 2 to 15 fixed sites plus a complementary set of mobile measurement vans. Typical systems range in price from $300,000 to $10,000,000.
The Company's direction finding (DF) and signal collection products are used to identify, locate, classify, and analyze radio transmissions using proprietary hardware and software for DF and communication intelligence (COMINT) applications. These systems are based on the same technology that is used in the Company's civilian spectrum management systems, but with enhanced capabilities to meet military and intelligence requirements. The DF and collection processes are performed rapidly, automatically, and without detection by the subject. The classification and analysis functions identify the modulation, frequency, and characteristics of the signals. The Company's DF and signal collection software performs these tasks automatically, thereby eliminating the need for the large numbers of operators that have been needed to run older systems. The Company's products can also be operated and monitored remotely, eliminating the need for operators to be located at the same site as the DF and signal processing equipment. The Company's signal processing systems can also integrate the output from other intelligence-gathering sources. In military applications, the integrated data provide system users with information they can use to estimate the disposition and intentions of potential adversaries.
The Company has introduced a revolutionary, full-featured digital VHF/UHF DF and COMINT hardware platform suitable for DF and specialized communications intelligence applications. The system architecture uses a high-speed analog-to-digital sampling technique to provide a high performance DF capability from 10 kHz to 3000 MHz. The unit is compact and has been packaged for portability. This product is especially useful for national security or intelligence customers interested in monitoring wireless communications within their own borders. The large instantaneous bandwidth of the system makes it ideal for monitoring signals with modern modulation features, such as those used in GSM and CDMA cellular telephone systems.
The sale prices of complete communications intelligence and DF systems range from approximately $100,000 to $10,000,000. Certain components of a system are often sold separately and are priced at considerably lower amounts.
Based on the technologies used in the SMS and DF systems, the Company has developed a low-cost, high performance HF receiver. This past fiscal year, the Company has sold a large quantity of these receivers to a company that provides truck communications and tracking services using HF. The Company expects to make additional sales of this product in the future.
FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS The financial results shown in the following tables are presented to comply with current financial accounting standards relating to business segment reporting. Information concerning the identifiable assets of the Company's business segments is contained in the Note, Business Segments in the Notes to Consolidated Financial Statements. In calculating operating profit, allocation of certain expenses among the business segments involves the exercise of certain business judgement.
The Company's product offerings are managed and directed by separate management teams. The products offered by the Broadcast Products and Signal Processing Products groups are distinct, as are the customers who routinely purchase these products. While the two business segments currently share facilities and certain manufacturing resources, most financial metrics used by management to direct the overall business are organized consistent with the definition of the two operating units. Please see ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the items in the table below.
Net Revenues and Operating Income (Loss) by Business Segment In thousands
Net Revenues
MARKETING The Company markets its equipment and systems to commercial and governmental organizations both in the United States and foreign countries primarily using its direct marketing force. For foreign sales, the Company is often assisted by its local representatives who are paid a commission on each sale. Foreign sales of some antennas having specialized military applications and certain Signal Processing products must have the approval of the United States Department of State which limits the sales of such products to foreign nationals. Such sales are subject to changes in United States policy concerning the export of military technology.
Historically, more than 90% of the Company's foreign sales have been denominated in United States dollars. The value of United States dollar relative to foreign currencies affects the competitive position of the Company's products overseas.
See Note 6 of the Notes to Consolidated Financial Statements for information concerning revenue attributable to export sales and individual customers.
MANUFACTURING The Company manufactures many of the key components of its Broadcasting and Signal Processing products, however it is implementing a systematic program to increase the outsourcing of many manufacturing operations that can be done more effectively, efficiently, and at lower cost by specialized manufacturing organizations. The Company is dependent upon the ability of its suppliers and subcontractors to meet performance specifications, quality standards, and delivery schedules in order to fulfill commitments to its customers. While the Company endeavors to assure the availability of multiple sources of supply, in certain cases involving complex equipment it must rely on a sole source. The failure of certain suppliers or subcontractors to meet the Company's needs may adversely affect the Company. While the Company has from time to time experienced delays in obtaining raw materials and components, to date these delays have not materially affected its business.
Although its customers install many of the Company's products, the Company offers installation services including turn-key project management.
BROADCASTING PRODUCTS Broadcast antenna systems are generally manufactured to order from standard parts. MF and HF antennas are made from cable, fittings, insulators, and fasteners. In the manufacturing process, fittings are attached to antenna wires by machinery that also measures, forms, and cuts the wires to close tolerances. FM and TV antennas do not use wire members and are fabricated from machined or extruded metal parts that are generally fabricated by specialized manufacturing firms. The Company assembles the antennas from these parts and then adjusts, tests, and ships the complete antennas.
SIGNAL PROCESSING PRODUCTS Signal processing products are assembled from standard computers, radio frequency switches, receivers, and specialized signal measuring instruments manufactured to the Company's specifications either by the Company or by qualified subcontractors.
To a significant extent, the heart of such systems lies in the proprietary software that serves as the interface to the hardware provided by the Company. The Company therefore employs a group of experienced software engineers who design and code the key software on which the Company's signal processing products are based. After the proprietary software is incorporated into the system, it is thoroughly tested in a simulated operating environment prior to final delivery.
The Company's receivers, DF processors, and HF ionospheric sounders are generally assembled from standard components and other items produced to the Company's specifications, such as printed circuit boards, fabricated metal parts and special oscillator and filter assemblies. Many of the products contain microprocessors for which proprietary software is designed and tested by the Company's engineers and technicians. Certain custom communications systems involve the integration of other manufacturers' equipment with products produced by the Company.
UNITED STATES GOVERNMENT CONTRACTS AND REGULATIONS Sales to the U.S. Government under prime and subcontracts accounted for 13%, 18%, and 31% of the Company's revenue in fiscal years 2000, 1999, and 1998, respectively. During the three year period ended September 30, 2000, all the Company's U.S. Government business was performed under fixed-price-type contracts (firm fixed-price and fixed-price incentive).
Under U.S. Government regulations, certain costs, including certain financing costs and marketing expenses, are not reimbursable. The U.S. Government also regulates the methods under which costs are allocated to U.S. Government contracts. Additionally, costs incurred under U.S. Government contracts are subject to audit. Management believes the results of such audits, if any, will not have a material effect on the Company's financial results.
U.S. Government contracts are, by their terms, subject to termination by the U.S. Government either for convenience or for default of the contractor. The continuation of long-term U.S. Government contracts may be dependent upon the continuing availability of congressional appropriations. Due to the size of the Company's contracts with the United States Information Agency ("USIA") and other agencies, a U.S. Government contract termination may have a material negative affect on the operating results of the Company. See further discussion in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations."
COMPETITION AND RISK The Company encounters intensive competition in the sale of its products from numerous other companies. Accordingly, substantial efforts must be undertaken continually and on a long-term basis in order to maintain existing levels of business. All of the Company's major competitors have substantially greater financial and marketing resources than the Company.
The world political environment has seen dramatic changes within the last several years and as a result U.S. Government procurements for the Company's broadcasting products have decreased substantially. As a result, the Company is focusing more on overseas and commercial opportunities, as are the Company's competitors.
BROADCASTING PRODUCTS The principal competitive factors in the broadcast and communications markets are reliability, performance, price, and breadth of product line.
In the U.S. DTV antenna market, the Company's principal competitors are Dielectric Communications and Andrew Corporation. In foreign TV and DTV markets its principal competitors are Kathrein/SIRA, Rymsa, and RFS. These are all well-established companies with broad product lines
The Company's principal competitors in the high frequency (HF) communications antenna market are Andrew Corporation and Antenna Products Corporation. In HF and MF broadcast antennas market, the principal competitors are divisions of larger companies, including Thomcast and Continental Electronics, both of which also manufacture broadcasting transmitters. The size, international reputation, and vertically integrated operations of these companies give them an advantage over the Company, particularly in bidding on entirely new stations in Third World countries.
SIGNAL PROCESSING PRODUCTS The principal competitive factors are the performance of the equipment and price. In military programs for signal collection and processing systems, the selection of a particular supplier's products frequently limits further competition by other vendors during the program's life cycle.
Competitors in signal processing products in the U.S. market include, CODEM Systems, Inc., Raytheon, Harris Corporation, Rockwell International Corp., Southwest Research Institute (SWRI), Thomson-CSF, Tadiran, and TRW. In foreign markets, in addition to these competitors are Rohde and Schwarz, Siemens Plessey & Co., Ltd, and Thomson -CSF.
The Company's principal competitors for spectrum management systems are Rohde and Schwarz, Tadiran, and Thomson-CSF. Since the competitors' products are often less expensive, the Company must convince its customers that its equipment has sufficient performance advantages to justify the higher price and therefore represents a "best value" for the customer.
Additionally, since signal processing and spectrum management systems are marketed in less developed countries, the ability to offer attractive financing alternatives also weighs strongly in decision process of many customers. The Company will continue to rely on the availability of external sources of capital to meet its requirement to offer financing on these international procurements.
For further information on risks, see Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations."
BACKLOG See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
RESEARCH AND DEVELOPMENT See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
PATENTS The Company believes that its success does not depend on the ownership of patents or trademarks but rather on its proprietary software, innovative skills, technical competence, marketing abilities, and responsiveness to customer needs.
EMPLOYEES As of September 30, 2000, the Company had 118 full-time employees. None of the employees are represented by a labor union, and the Company considers its employee relations to be good. The Company's success is dependent on its ability to retain highly skilled personnel.
ITEM 2
ITEM 2 - PROPERTIES
The Company believes that its office space for its corporate headquarters is suitable and adequate and will meet its needs for the near term. However, additional manufacturing facilities may be required to support the Company's growth in the future. The Company reasonably expects to secure any additional required manufacturing space under terms acceptable to the Company.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS On December 14, 1994, the California Regional Water Quality Control Board for the San Francisco Bay Region adopted an order naming the Company as a potentially responsible party (PRP), along with several other parties, for ground water contamination in the vicinity of a property the Company formerly occupied as a tenant in Mountain View, California. The Company contends that it is not responsible for any such contamination. In a related development in early 1995, the Regional Water Board ordered the owner of the property to conduct a program of soil sampling to determine if the site is currently a source of ground water contamination. The results of this sampling program were reviewed by and summarized in a letter from the Regional Water Board dated October 11, 1995, in which it concluded that the current levels of contamination do not indicate the site is a source of ground water contamination presently, and as a result no further investigative or remedial action is necessary. However, in its correspondence the Regional Water Board refused to rule out the possibility that the site was a source of contamination in the past and as such it has left the matter to be resolved through binding arbitration. In April 1997, pursuant to their rights as the largest PRP, Teledyne, Spectra Physics and Montwood submitted a petition to convene a hazardous substance cleanup arbitration panel (HASCAP) with an ultimate goal of determining and apportioning liability for the cleanup costs amongst all of the PRPs associated with the site. The Company and the other respondents objected to the convening of an arbitration panel.
On September 24, 1998, the Office of Environmental Health Hazard Assessment ("OEHHA") advised the parties that the legislative authority for the arbitration panels had "sunsetted" and thus OEHHA would take no further action towards ruling on the respondents' objections or convening a HSCAP arbitration panel unless the legislature took action to reinstate the legislative authority for these panels.
Subsequently, the legislative authority for the HSCAP arbitration panels was reinstated and the Teledyne parties have advised OEHHA that they still wish to arbitrate the matter. Should OEHHA now overrule TCI's and the other respondents' objections to the convening of the panel, TCI may take legal action to dispute the panel's jurisdiction and in all events will vigorously maintain that it is not responsible for any of the groundwater contamination in the area and should not share in any of the costs associated with the groundwater extraction system being operated by Teledyne/Spectra Physics.
At present, there is no lawsuit, arbitration or other legal or administrative proceeding pending against TCI regarding this Teledyne/Spectra Physics matter, and it is possible that no further legal proceedings regarding this matter involving TCI will occur. The Company cannot estimate the cost if any, that will be required in the resolution of this matter.
The Company is from time to time involved in routine litigation or threatened litigation arising from the ordinary course of its business. Such matters, if decided adversely to the Company, would not, in the opinion of management, have a material adverse effect on the financial condition of the Company.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth fiscal quarter of 2000.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded over-the-counter on the National Market System and quoted on the National Association of Securities Dealers Automated Quotation System (Nasdaq Symbol TCII). The following table sets forth the high and low intraday sales price as reported on the Over-the-Counter National Market System. These prices do not include retail markups, markdowns or commissions.
As of September 30, 2000, there were 524 stockholders of record. The Company has not paid any cash dividends on its common stock since inception, and the Company presently intends to reinvest any earnings into the business.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA The following table summarizes certain selected consolidated financial data and is qualified in its entirety by the more detailed Consolidated Financial Statements included elsewhere herein.
QUARTERLY FINANCIAL DATA FOR THE TWO YEARS ENDED SEPTEMBER 30, 2000 Since revenue is generally recognized on a percentage of completion basis, which is based upon total direct and indirect costs incurred, there are often fluctuations in the Company's quarterly results. These fluctuations can result from uneven flow of incoming material and revisions to cost estimates on long-term contracts.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this review, along with the Business Segment data shown on page 5, reflects the Company's operations.
Except for the historical financial information contained herein, the following discussion and analysis may contain "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include declarations regarding the intent, belief or current expectations of the Company and its management. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties; actual results could differ materially from those indicated by such forward-looking statements.
RESEARCH AND DEVELOPMENT During the last three years the Company has expended approximately $5,300,000 on internal research and development ("IR&D") efforts related to its product and market diversification efforts. All costs for such product development are presently funded internally and are expensed as incurred. In the past several years, IR&D efforts had been largely focused on developing the Company's new signal processing product line, which is the basis of the civilian and military spectrum monitoring systems the Company is currently selling. The Company's IR&D efforts not only produced equipment that operates at the leading edge, but also can be manufactured at relatively low cost. The bulk of the signal processing IR&D has now been completed, although the Company engages in ongoing sustaining engineering to keep its products at the forefront of performance and manufacturability. In order to support product development in the emerging and growing digital TV market, in this past fiscal year the Company has focused its IR&D efforts on its broadband DTV broadcasting product line. As a result of these efforts, two of the Company's senior engineers were awarded U.S. Patent No. 6,150,988 for a wideband DTV slot antenna, a product that solves many difficult problems faced by broadcasters in the world-wide conversion to digital TV. The Company's wideband DTV slot antennas are gaining wide acceptance in the marketplace.
BACKLOG The Company's total backlog as of September 30, 2000, was approximately $26 million, compared to approximately $28 million as of September 30, 1999. The following table sets forth the total backlog, which includes the value of unexercised options (on U.S. Government contracts) which the Company believed were likely to be exercised, for the periods indicated (in thousands):
Of the $26 million backlog at 2000 fiscal year end, $17 million is expected to be recognized as revenue prior to September 30, 2001.
The Company continues to secure significant orders in its new market areas. These are digital TV products for the U.S. commercial broadcasting industry, signal collection systems used by foreign military organizations for intelligence or other national security operations, and test and measurement products used by telecommunications organizations for regulatory operations or system testing. All of these market segments are growing and present significant sales opportunities for the Company's new products.
RESULTS OF OPERATIONS As an aid to understanding the Company's consolidated operating results, the following table indicates the percentage relationships of income and expense items for each of the last three fiscal years.
The approximate revenue attributable to contracts from both domestic and overseas customers is shown below (in thousands):
FISCAL 2000 COMPARED TO FISCAL 1999 Revenues for fiscal 2000 increased by 24%, from $24.7 million to $30.6 million when compared to fiscal 1999. Fiscal year 2000 benefited from the fact that a significant number of orders were booked towards the end of fiscal 1999 and thus were ready for execution in fiscal 2000. During the year the Company continued to improve contract management and execution as evidenced by its increased profitability. Fiscal 1999 revenues were negatively affected by an unplanned delay in obtaining system acceptance from one major customer. The Company obtained final system acceptance from the customer in January 2000 and received final payment in March 2000.
Revenues for the Broadcast Products segment increased from $8.9 million in fiscal 1999 to $10.3 million in fiscal 2000, an increase of 16%. This increase in revenues was due primarily to the timely receipt of new orders during the current fiscal year and a change in product mix favoring the introduction of the Company's new DTV antenna products. The net loss for this segment in fiscal 2000, however, increased from $.2 million to $1.2 million when compared to fiscal 1999. This was largely due to lower margins available from contracts executed in fiscal 2000 coupled with increased spending on internal research and development efforts associated with completion of the initial DTV products.
Revenues for the Signal Processing Products segment increased from $15.9 million in fiscal 1999 to $20.3 million in fiscal 2000, an increase of 28%. This increase in profitability is a result of realizing specific production and cost efficiencies that accompanied larger production quantities. In 1997, instead of continuing to rely on purchasing major components of its system from third parties, the Company decided to design and manufacture its own proprietary test and measurement equipment. This enabled the Company to manage costs more effectively and to exert more control over its delivery schedules. This investment in product development had a favorable impact on the operating income of the Signal Processing Products segment for fiscal 2000. Operating income for fiscal 2000 was $2.1 million compared to an operating loss of $1.6 million in fiscal 1999.
The cost of revenues in fiscal 2000 was $19.7 million compared to $16.5 million in fiscal 1999. Cost expressed as a percentage of revenue decreased from 67% in fiscal 1999 to 65% in fiscal 2000. The reasons for this decrease include favorable closure on one major contract and better overall contract execution in the Signal Processing Products segment.
As in fiscal 1999, marketing, general and administrative expenses declined when expressed as a percentage of revenue. These percentages decreased from 41% in fiscal 1999 to 33% in fiscal 2000, an 8% decrease. The Company successfully managed to maintain its marketing, general and administrative expenses at the same level as in fiscal 1999 even though revenues increased by 24% in fiscal 2000 compared to fiscal 1999.
Interest income increased by 13% or $76,000 in fiscal 2000 compared to fiscal 1999. This was due to a relatively higher cash and short-term investment balance in fiscal 2000 and higher interest rate earned on the Company's short-term investments.
FISCAL 1999 COMPARED TO FISCAL 1998 Revenues for fiscal year 1999 were similar to fiscal 1998, showing a slight decrease of 2%. The net loss for fiscal 1999, however, decreased by 68% compared to fiscal 1998. This is attributable, in part, to an improved level of contract execution as measured by better gross margins across most product sales. Both fiscal 1998 and 1999 revenues and profitability were negatively influenced by an unplanned delay in obtaining system acceptance of one contract for spectrum management equipment. This performance delay caused the Company to record a negative adjustment during the fourth quarter of fiscal 1998 in the contract completion estimates reflecting management's best estimate of the costs to ultimately complete the contract.
Revenues for the Signal Processing Products segment increased 19% from $13.4 million in fiscal 1998 to $15.9 million in fiscal 1999. The net loss decreased by 59%, from $3.9 million in fiscal 1998 to $1.6 million in fiscal 1999. While still lagging management expectations, this improvement in profitability was made possible by a healthy mix of revenues coming from sales of its traditional communications intelligence products and more consistent performance on contracts for spectrum management equipment.
Revenues for the Broadcast Products segment decreased from $11.9 million in fiscal 1998 to $8.9 million in fiscal 1999, a decrease of 25%. This decrease in revenues was due to a delay in receiving some significant orders, most of which are expected in fiscal year 2000. However, the net loss also decreased in fiscal 1999 compared to fiscal 1998, from $.5 million to $.2 million, a decrease of 67%. This decrease in net loss in fiscal 1999 was made possible by improved contract execution and a lower allocation of common expenses.
Cost of revenues in fiscal 1999 expressed as a percentage of revenue decreased to 67% from 72% in the prior year. This decrease was due in part to higher margins from contracts in fiscal 1999. Also, in fiscal 1998 the Company recorded an adjustment to account for the additional cost due to the delay in obtaining system acceptance of one significant contract in the Signal Processing Products business segment, which significantly decreased signal processing margin in that year.
Marketing, general and administrative expenses expressed as a percentage of revenue decreased from 45% in fiscal 1998 to 41% in fiscal 1999. This decrease was due to a lower level of expenditure in internal research and development, due to completion of development of a major product line, and lower marketing expenses.
Interest income decreased by 22% or $164,000 in fiscal 1999 compared to fiscal 1998. This is because the Company maintained a lower cash balance for most of the fiscal year.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS The Company operates in a highly competitive environment that involves a number of risks, some of which are beyond the Company's control. The following discussion highlights some of these risks.
FLUCTUATIONS IN OPERATING RESULTS The Company's operating results may fluctuate from quarter to quarter and year to year for a number of reasons. While there is no seasonality to the Company's business, because of the Company's relative small size, combined with the extended delivery cycles of its long-term project-oriented business, revenue and accompanying gross margins are inherently difficult to predict. Because the Company plans its operating expenses, many of which are relatively fixed in the short term, based on the assumption of stable performance, a relatively small revenue shortfall may cause profitability from operations to suffer. Historically, the Company has endured periods of volatility in its revenue results due to a number of factors, including shortfalls in new orders, delays in the availability of new products, delays in subcontractor provided materials and services, and delays associated with foreign construction activities. Gross margins are strongly influenced by a mix of considerations, including pressures to be the low price supplier in competitive bid solicitations, the mix of contract material and non-recurring engineering services, and the mix of newly developed and existing products sold to various customers. The Company believes these historical challenges will continue to affect its future business.
MANAGING A CHANGING BUSINESS The Company is in the process of adopting a business management plan that includes substantial investments in its sales and marketing organizations, increased funding of existing internal research and development programs, and certain investments in corporate infrastructure that will be required to support the Company's diversification objectives during the next three years. Accompanying this process are a number of risks, including a higher level of operating expenses, the difficulty of competing with companies of larger size for talented technical personnel, and the complexities of managing a changing business.
RISK ASSOCIATED WITH EXPANSION INTO ADDITIONAL MARKETS AND PRODUCT DEVELOPMENT The Company believes that its future success is substantially dependent on its ability to successfully acquire, develop and commercialize new products and penetrate new markets. In addition to the Company's ongoing efforts to diversify its product offerings within its core Broadcast, Signal Processing and Test and Measurement, the Company intends to pursue a diverse, but focused product and market development initiative during the next three years. The Company believes that its general knowledge of RF technology and its related applications combined with its proven ability to conduct business in overseas markets can be exploited to return the Company to an aggressive growth posture. While not strictly limited to these product areas, the Company is currently pursuing development of proprietary broad band antenna systems for FM and TV broadcasting and specialized receivers and processors to increase the usefulness and reduce the cost of its signal processing and test and measurement systems. There can be no assurance that the Company can successfully develop these or any other additional products, that any such products will be capable of being produced in commercial quantities at reasonable cost, or that any such products will achieve market acceptance. Should the Company expend funds to acquire outside entities or technology, there can be no assurance that sufficient returns will be realized to offset these investments. The inability of the Company to successfully develop or commercialize new products or failure of such products to achieve market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH CONDUCTING BUSINESS OVERSEAS A substantial part of the Company's revenue is derived from fixed priced contracts with foreign governmental entities. With increasing frequency, the Company finds a demand for its products in third world countries and developing nations which have an inherently more volatile and uncertain political and credit risk profile than the U.S. Government market with which the Company is accustom to conducting its business. While the Company seeks to minimize the collection risks on these contracts by normally securing significant advanced payments with the balance secured by irrevocable letters of credit, the Company cannot always be assured of receiving full payment for work that it has performed due to unforeseen credit and political risks.
The Company is in the process of executing contract obligations in a number of countries that have been subjected to substantial devaluations of currency during the last fiscal year. While the majority of payments owed the Company are made in U.S. dollars and are secured before product shipment with irrevocable letters of credit, scenarios could occur that make it difficult for the Company to collect all the money owed against the payment of a given contract. Should such a default on payments owed the Company ever occur, a significant effect on earnings, cash flows and cash balances may result.
COMPETITION Most all of the Company's products are positioned in niche markets which include strong elements of imbedded proprietary technology. In most of these markets, the Company competes with companies of significantly larger size, many of whom have substantially greater technical, marketing, and financial resources compared to similar resources available within the Company. This type of competition has resulted in and is expected to continue to result in significant price competition.
LIQUIDITY AND CAPITAL RESOURCES Cash provided by operations in fiscal 2000 was $1.5 million compared of $2.3 million in fiscal 1999. Cash used in operations was $.7 million in fiscal 1998. In fiscal 2000, cash provided by operation mainly resulted from a net income of $1.6 million, a decrease in prepaid taxes of $1.5 million and an increase in accounts payable of $.9 million. The decrease in prepaid taxes of $1.5 million was attributable to the Company concluding one major overseas contract, specifically the Company was able to bill and collect these taxes from the customer. In fiscal 1999, cash provided by operations resulted primarily from an increase in customer deposits and billings on uncompleted contracts in excess of revenue recognized of $1.8 million, and an increase in accrued liabilities of $.7 million. In fiscal 1998, cash used in operations resulted primarily from a net loss of $3.7 million, a decrease in accounts payable of $1.9 million, and a prepayment of $1.5 million in sales tax (VAT) for importation of equipment under an overseas contract - offset by cash provided by a decrease in accounts receivables of $4.4 million.
Cash of $3.1 million was used in investing activities in fiscal 2000 compared to cash provided from investing activities of $.3 million in fiscal 1999. Cash used in investing activities for fiscal 1998 was $1.0 million.
As of September 30, 2000, the Company had approximately $16.4 million in cash and short-term investments an increase of $1.7 million from September 30. 1999. As of September 30, 2000, the Company had standby letters of credit outstanding totaling approximately $2.9 million. These standby letters of credit are collateralized by the Company's cash or short-term investments. See further discussion in Note 8 of the Notes to Consolidated Financial Statements. The Company currently believes that its cash and expected cash flow from operations will be sufficient to fund its operations through fiscal 2001.
A significant portion of the Company's revenues is associated with long-term contracts and programs in which there are significant inherent risks. These risks include the uncertainty of economic conditions, dependence on future appropriations and administrative allotments of funds, changes in governmental policies, difficulty of forecasting costs and work schedules, product obsolescence, and other factors characteristic of the industry. Contracts with agencies of the U.S. Government or with prime contractors working on U.S. Government contracts contain provisions permitting termination at any time for the convenience of the Government. No assurance can be given regarding future financial results as such results are dependent upon many factors, including economic and competitive conditions, incoming order levels, shipment volume, product margins and foreign exchange rates.
The large size of certain of the Company's orders makes it possible that a single contract termination, cancellation, delay, or failure to perform could have a significant adverse effect on revenue, results of operations, and the cash position of the Company.
A portion of the Company's revenues is derived from governments in areas of political instability. The Company generally attempts to reduce the risks associated with such instability by requesting advance payments if appropriate, as well as letters of credit or central government guarantees. Most of the Company's overseas contracts provide for payments in U.S. dollars. However, in certain instances the Company, for competitive reasons, must accept payment in a foreign currency.
Management does not consider inflation to be a significant factor in its operations.
RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. This statement as amended will be effective for all interim periods of fiscal years beginning after June 15, 2000, and management does not believe the adoption of SFAS No. 133 will have a material effect on the financial position of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements". SAB 101 summarizes the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. In March 2000, the SEC issued SAB No. 101A that delayed the implementation date of SAB No. 101. In June 2000, the SEC issued SAB No. 101B that further delayed the implementation date of SAB No. 101. The Company must adopt SAB No. 101 no later than in the fourth quarter of fiscal 2001. The Company does not expect the adoption of SAB No. 101 to have a material impact on its financial position or results of operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DERIVATIVES AND FINANCIAL INSTRUMENTS
FOREIGN CURRENCY HEDGING INSTRUMENTS The Company transacts business in various foreign currencies. Accordingly, the Company is subject to exposure from adverse movements in foreign currency exchange rates. This exposure is primarily related to a number of contracts denominated in British pound sterling, a contract in New Taiwan dollar and a contract in Venezuelan bolivars. As of September 30, 2000, the Company had no hedging contracts outstanding.
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.
FIXED INCOME INVESTMENTS The Company's investments in U.S. corporate securities include commercial paper. Foreign securities include certificates of deposit with financial institutions, most of which are denominated in U.S. dollars. The Company's cash equivalents and short-term investments have generally been held until maturity. Gross unrealized gains and losses were negligible as of September 30, 2000.
The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investments. The Company places its investments with high credit quality issuers and, by policy, limits the amount of credit exposure to any one issuer. The Company's general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting market and credit risk. All highly liquid investments with a maturity of three months or less at the date of purchase are considered to be cash equivalents; investments with maturities between three and twelve months are considered to be short-term investments. The average interest rate on the investments portfolio is 6.3%. As of September 30, 2000, there are no investments with maturities greater than 12 months. The Company does not expect any material loss with respect to its investment portfolio.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Consolidated Financial Statements.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT This information is included in Part I of this Report under the caption "Executive Officers of the Registrant who are not Directors" following Item 4, and/or will be included in the definitive Proxy Statement of Registrant filed with the Securities and Exchange Commission and is incorporated herein by reference.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION This information will be included in the definitive Proxy Statement filed with the Securities and Exchange Commission and is incorporated herein by reference.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information will be included in the definitive Proxy Statement filed with the Securities and Exchange Commission and is incorporated herein by reference.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information will be included in the definitive Proxy Statement filed with the Securities and Exchange Commission and is incorporated herein by reference.
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
A. FINANCIAL STATEMENTS AND SCHEDULE 1. Consolidated Financial Statements as identified in the Index on Page of this report.
2. Financial Statement Schedule.
In accordance with Regulation S-X, individual financial statements of the Registrant and its subsidiaries and other financial statement schedule are not included herewith because (a) they are not applicable to or required of the Registrant or (b) the information required to be set forth therein is included in the financial statements or other schedules.
B. REPORTS ON FORM 8-K Not applicable.
C. EXHIBITS
3.1 Restated Certificate of Incorporation of TCI International, Inc. (Incorporated by reference to Exhibit 3.1 to the Company's Form 10-K for fiscal year ended September 30, 1990; commission file number 0-10877)
3.2 Bylaws of Technology for Communications International, Inc. (Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-4 No. 33-11265)
3.3 Amendments to the Bylaws of TCI International, Inc. (Incorporated by reference to Exhibit 3.3 to the Company's Form 10-K for fiscal year ended September 30, 1988; commission file number 0-10877)
3.4 Amendment to Restated Certificate of Incorporation of TCI International, Inc. (Incorporated by reference to Exhibit 3.4 to the Company's Form 10-Q for the quarter ended March 31, 1992; commission file number 0-10877)
4.1 Rights Agreement between the Company and Bank of America, NT&SA, dated December 15, 1989 (Incorporated by reference to Exhibit 1 to the Company's Form 8-K dated January 5, 1990; commission file number 0-10877)
4.2 First Amendment to Rights Agreement between the Company and Bank of America, NT&SA. (Incorporated by reference to Exhibit 2 to the Company's Form 8, Amendment No. 1 dated October 7, 1991; commission file number 0-10877)
10.1 The Company's Stock Option Plan (1981) as amended. (Incorporated by reference to Exhibit 28(a) to the Company's Registration Statement on Form S-8 No. 33-11339 filed on December 29, 1988.)
10.2 Form of Incentive Stock Option Agreement under the Company's Stock Option Plan (1981). (Incorporated by reference to Exhibit 28(b) to the Company's Registration Statement on Form S-8 No. 33-11339 filed on December 29, 1988.)
10.3 Form of Non-Qualified Stock Option Agreement under the Company's Stock Option Plan (1981). (Incorporated by reference to Exhibit 28(c) to the Company's Registration Statement on Form S-8 No. 33-11339 filed on December 29, 1988.)
10.4 1995 Non-employee Director Stock Option Plan under the Company's Stock Option Plan (1981). (Incorporated by reference to Exhibit 99.1, 99.2 and 99.3 to the Company's Registration Statement on form S-8 No. 33-11339 filed on December 29, 1988.)
10.5 The Company's Employee Stock Ownership Plan (Incorporated by reference to Exhibit 99 to the Company's Registration Statement on Form S-8 No. 33-73484 filed on December 27, 1993.)
10.6 Amendment No. 1 to the Company's Employee Stock Ownership Plan dated as of October 1, 1992. (Incorporated by reference to Exhibit 10.6 to the Company's Form 10-K for fiscal year ended September 30, 1996; commission file number 0-10877)
10.7 Plan Amendment to the Company's Employee Stock Ownership Plan dated as of January 1, 1994. (Incorporated by reference to Exhibit 10.7 to the Company's Form 10-K for fiscal year ended September 30, 1996; commission file number 0-10877)
10.8 TCI's 401(k) Plan. (Incorporated by reference to Exhibit 10.21 to TCI's Form 10-K for the fiscal year ended September 30, 1986; commission file number 0-10877)
10.9 Amendments la, 1b, and 2 to the TCI International, Inc. 401(k) Plan. (Incorporated by reference to Exhibit 10.15 to the Company's Form 10-K for fiscal year ended September 30, 1988; commission file number 0-10877)
10.10 Directors' Indemnification Agreements and Addendum's dated November 29, 1990. (Incorporated by
reference to Exhibit 10.21 to the Company's Form 10-K for fiscal year ended September 30, 1990; commission file number 0-10877)
10.11 Sublease between Technology for Communications International and Fairchild Technologies, dated May 1, 2000 (Incorporated by reference to Exhibit 10.11 to the Company's Form 10-K fiscal year ended September 30, 2000; commission file number 0-10877)
22 Schedule II - Valuation and Qualifying Accounts
23 List of Subsidiaries of TCI International, Inc.
24 Consent of KPMG LLP
27 Financial Data Schedule
TCI INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors TCI International, Inc.:
We have audited the accompanying consolidated balance sheets of TCI International, Inc. (the Company) and subsidiaries as of September 30, 2000 and 1999, and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity and cash flows for each of the years in the three-year period ended September 30, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TCI International, Inc. and subsidiaries as of September 30, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2000 in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP
Mountain View, California November 10, 2000
TCI INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS
See accompanying Notes to Consolidated Financial Statements.
TCI INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
See accompanying Notes to Consolidated Financial Statements
TCI INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See accompanying Notes to Consolidated Financial Statements.
TCI INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying Notes to Consolidated Financial Statements.
TCI INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of TCI International, Inc. and its subsidiaries (collectively, the "Company"). The Company has three wholly-owned subsidiaries, Technology for Communications International ("TCI"), BR Communications ("BR"), and TCI Wireless ("TCIW"). All significant intercompany balances and transactions have been eliminated.
DESCRIPTION OF BUSINESS - The Company manufactures and markets signal collection systems, spectrum and frequency management systems, special purpose communications systems, and antennas and related equipment for high-power broadcasting, over-the-horizon radar, and short-wave communication. The Company's products historically have been sold primarily to U.S. and foreign government agencies, and to a lesser extent, commercial broadcast entities.
FISCAL YEAR END - Although for presentation purposes, the Company has indicated its year end as September 30, its fiscal year actually ends on the Sunday nearest to September 30. The Company's fiscal year for 2000, 1999, and 1998 ended on October 1, October 3, and October 4, respectively.
CASH EQUIVALENTS - Cash equivalents consist of money market investments, government securities, and commercial paper purchased with maturity at the date of acquisition of less than 3 months ($9,580,000 as of September 30, 2000 and $7,281,000 as of September 30, 1999). The restricted cash represents the amount held as collateral for stand-by letters of credit at the end of the fiscal year.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash, cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturities of such investments. The Company's short-term investments are carried at fair value, based on quoted market prices for these or similar investments.
FOREIGN CURRENCY HEDGING INSTRUMENTS - The Company enters into forward exchange contracts to hedge foreign currency exposures on a continuing basis for periods consistent with its committed exposures. These transactions generally do not subject the Company to risk of accounting loss because gains and losses on these contracts offset losses and gains on the assets and liabilities being hedged. However, the Company is exposed to credit related losses in the event of nonperformance by the counterparties in these contracts. These contracts normally have maturities of less than three months, and the amounts of unrealized gains and losses are immaterial.
REVENUE RECOGNITION - Revenue and costs under cost-reimbursable type contracts are recognized as costs are incurred and include applicable fees. Revenues from contracts calling for delivery of standard products are recognized as the product is shipped. Revenue and costs under certain long-term fixed-price contracts are recognized on the percentage-of-completion method, based on total direct and indirect production costs incurred. Amounts in excess of agreed upon contract price for customer-directed changes, customer delays or other causes of additional contract costs are recognized in contract value if it is probable that a claim for such amounts will result in additional revenue and the amounts can be reasonably estimated. Revisions in cost and profit estimates are reflected in the period in which the facts requiring the revision become known and are estimable. Losses on contracts are recorded when identified.
RISK ASSOCIATED WITH LONG-TERM CONTRACTS - A significant portion of the Company's revenue has been associated with long-term contracts and programs in which there are significant inherent risks. These risks include the uncertainty of economic conditions, dependence on future appropriations and administrative allotment of funds, changes in governmental policies, difficulty of forecasting costs and work schedules, product obsolescence, and other factors characteristic of the industry. To offset the expected downturn in revenue from the sales of signal collection systems, antenna systems, and special communications equipment to the U.S. Government, the Company plans to increase focus on overseas and commercial sales. However, many overseas customers are also experiencing reductions in their defense equipment budgets. Contracts with the U.S. Government are, by their terms, subject to termination by the U.S. Government either for its convenience or for default by the contractor. Additionally, costs incurred under U.S. Government contracts are subject to audit. Management believes the results of such audits, when conducted, will not have a material effect on the Company's financial results.
TCI INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A portion of the Company's revenue is derived from governments in areas of political instability. The Company generally attempts to reduce the risks associated with such instability by requesting advance payment if appropriate, as well as letters of credit or central government guarantees. Most of the Company's overseas contracts provide for payments in U.S. dollars. However, in certain instances the Company, for competitive reasons, must accept payment in a foreign currency.
RESEARCH AND DEVELOPMENT EXPENSES - Marketing, general and administrative expenses include independent (not directly related to or funded by a customer contract) research and development costs of $1,222,000 in fiscal 2000, $1,717,000 in fiscal 1999, and $2,369,000 in fiscal 1998.
INVENTORIES - Inventories are stated at the lower of cost (first-in, first-out basis) or market and include material, labor, and overhead.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost and are depreciated or amortized using the straight-line method over the following estimated useful lives:
INCOME TAXES - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS TO BE DISPOSED OF - The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to the future cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell. To date, no adjustments to the carrying value of the Company's long-lived assets have been required.
STOCK OPTION PLAN - The Company accounts for its stock option plan in accordance with the intrinsic method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock-based employee compensation plan. The Company has elected to apply the intrinsic value based method of accounting and has adopted the disclosure requirements of Statement of Financial Accounting Standards (SFAS No. 123), Accounting for Stock Based Compensation.
USE OF ESTIMATES - The Company's management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
TCI INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. This statement as amended will be effective for all interim periods of fiscal years beginning after June 15, 2000, and management does not believe the adoption of SFAS No. 133 will have a material effect on the financial position of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements". SAB 101 summarizes the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. In March 2000, the SEC issued SAB No. 101A that delayed the implementation date of SAB No. 101. In June 2000, the SEC issued SAB No. 101B that further delayed the implementation date of SAB No. 101. The Company must adopt SAB No. 101 no later than in the fourth quarter of fiscal 2001. The Company does not expect the adoption of SAB No. 101 to have a material impact on its financial position or results of operations.
2. SHORT-TERM INVESTMENTS The Company classifies its investments as "available-for-sale securities" and the carrying value of such securities has been adjusted to fair market value. The resulting change in fair market value is reported as a separate component of other comprehensive income or loss until realized. Realized gains or losses on available for-sale securities are determined on a specific identification basis.
The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale securities by major security type at September 30, 2000 and September 30, 1999, were as follows:
The short-term investments portfolio is managed by a securities investment firm, which invests primarily in bonds, based upon the Company's investment guidelines. The securities are of investment quality to ensure safety of principal and are selected by the firm, who has been given semi-discretionary authority to manage assets in the portfolio. Substantially all of the Company's short-term investments have maturities of one year or less.
3. ACCOUNTS RECEIVABLE Accounts receivable contain amounts which are billed in accordance with the terms of the related contracts, which may allow for progress billings upon shipment, billings upon completion, or other billing arrangements. Such amounts are classified as billed account receivables. Unbilled accounts receivables represent revenue recognized generally under a percentage of completion basis which, based upon the terms of the related contracts are not yet billable.
TCI INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVENTORIES Inventories consist of the following:
5. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
6. EXPORT REVENUE AND REVENUE FROM MAJOR CUSTOMERS Revenue was derived from sales to customers located in the following geographic areas:
Sales under U.S. Government prime and subcontracts accounted for 13%, 18%, and 31% of the Company's total revenue in 2000, 1999, and 1998, respectively, of which the U.S. Government prime contracts accounted for 12%, 17%, and 29%, respectively.
Two customers represented 27% and 13%, respectively, of total revenue for fiscal 2000 and 15% and 0% of total accounts receivable at September 30, 2000.
7. ACCRUED LIABILITIES Accrued liabilities consist of the following:
TCI INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. BANK CREDIT AGREEMENTS The Company has a bank credit agreement that provides a fully secured credit facility for the issuance of stand-by letter of credits up to $7,000,000. This credit facility is secured by the Company's cash or short-term investment portfolio. As of September 30, 2000, $4,084,000 of this credit line was available for issuance of stand-by letters of credit.
At September 30, 2000, there were outstanding stand-by letters of credit of approximately $2,916,000 held as bid, performance and payment bonds. The stand-by letters of credit expire at various dates through the year 2002; however, certain performance bonds are automatically renewable until canceled by the beneficiary.
Short term investments totaling $2,916,000 are held by banks as collateral for outstanding stand-by letters of credit at September 30, 2000.
9. STOCKHOLDERS' EQUITY a. NET INCOME (LOSS) PER SHARE Basic and diluted net income (loss) per share has been computed using the weighted-average number of common shares outstanding in each year. Diluted net income (loss) per share reflects the potential dilution that could occur if dilutive securities were exercised into common shares. There were options outstanding to purchase 656,000, 827,400, and 681,200, shares of the Company's common stock with a weighted-average exercise price of $4.83, $4.41, and $5.49, as of September 30, 2000, 1999 and 1998, respectively, were excluded from diluted earnings per share but which could potentially dilute basic earnings per share in the future.
A reconciliation of the earnings and shares used in the computation for basic and diluted earnings per share follows:
b. EMPLOYEE BENEFIT PLANS The Company has a 401(k) Plan (the Plan) covering all employees of the Company. The Plan provides for voluntary salary reduction contributions of up to 15% of eligible participants' annual compensation. In fiscal 1998 and 1997, the Company made matching contributions of up to 2% of participants' annual compensation; in fiscal 1999 the Company increased its matching contributions to up to 5% of eligible participants' annual compensation. The Company's contributions to the Plan were approximately $320,000 for fiscal 2000, $360,000 for fiscal 1999, and $140,000 for fiscal 1998.
Historically, the Company made contributions to the Employee Stock Ownership Plans (ESOP) subject to the approval of the Board of Directors. In fiscal 1999, the Company elected to freeze the Employee Stock Ownership Plan. Thus, the Company does not plan to make any contributions to the plan in the future. As of September 30, 2000, the ESOP owns 194,094 of the Company's outstanding shares.
The Company also has a Profit Sharing Plan and has accrued a contribution to the plan of approximately $170,000 for fiscal 2000. TCI INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
c. STOCK OPTION PLAN In 1981, the Company adopted the 1981 Stock Option Plan ("1981 Plan") pursuant to which the Company's Board of Directors may grant stock options to key employees, non-employee directors and independent contractors. The 1981 Plan authorizes the grant of options to purchase an aggregate of 1,100,000 shares of Common Stock. Such shares are to be made available either from the Company's authorized and previously unissued shares of Common Stock or from shares reacquired by the Company.
Under the 1981 Plan, the Board of Directors has the authority to determine the time or times at which options granted under the 1981 Plan are to become exercisable. Options under the 1981 Plan are generally exercisable in annual increments, on a cumulative basis, during the term of the option. Options granted may not be exercised after the expiration of ten years from the date of grant. The options may be granted at not less than the fair market value of the Common Stock on the date of the option grant.
Stock option activity during the period indicated is as follows:
At September 30, 2000, there were 21,534 shares available for future grant under the 1981 Plan. The per share weighted-average fair value of stock options granted during fiscal 2000 and 1999 was $ 2.61and $.78, respectively, on the date of the grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
TCI INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company uses the intrinsic value method to account for its 1981 Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options, the Company's net income (loss) and net income (loss) per share would have increased to the pro forma amounts indicated below:
At September 30, 2000, the range of exercise price and weight-average remaining contractual life of outstanding options was as follows:
At September 30, 2000 and 1999, the number of options exercisable was 368,174 and 546,400, respectively, and the weighted-average exercise price of those options was $5.33 and $5.28, respectively.
TCI INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES The Company leases certain of its facilities and equipment under operating leases which expire at various dates through fiscal 2005 and require the following future minimum payments:
Rental expense was $544,000, $463,000, and $545,000 in fiscal 2000, 1999, and 1998, respectively.
On December 14, 1994, the California Regional Water Quality Control Board for the San Francisco Bay Region adopted an order naming the Company as a potentially responsible party (PRP), along with several other parties, for ground water contamination in the vicinity of a property the Company formerly occupied as a tenant in Mountain View, California. The Company contends that it is not responsible for any such contamination. In a related development in early 1995, the Regional Water Board ordered the owner of the property to conduct a program of soil sampling to determine if the site is currently a source of ground water contamination. The results of this sampling program were reviewed by and summarized in a letter from the Regional Water Board dated October 11, 1995 in which it concluded that the current levels of contamination do not indicate the site is a source of ground water contamination presently, and as a result no further investigative or remedial action is necessary. However, in its correspondence the Regional Water Board refused to rule out the possibility that the site was a source of contamination in the past and as such it has left the matter to be resolved through binding arbitration. In April, 1997, pursuant to their rights as the largest PRP, Teledyne, Spectra Physics and Montwood submitted a petition to convene a hazardous substance cleanup arbitration panel (HASCAP) with an ultimate goal of determining and apportioning liability for the cleanup costs amongst all of the PRPs associated with the site. The Company and the other respondents objected to the convening of an arbitration panel.
On September 24, 1998, the Office of Environmental Health Hazard Assessment ("OEHHA") advised the parties that the legislative authority for the arbitration panels had "sunsetted" and thus OEHHA would take no further action towards ruling on the respondents' objections or convening a HSCAP arbitration panel unless the legislature took action to reinstate the legislative authority for these panels.
Subsequently, the legislative authority for the HSCAP arbitration panels was reinstated and the Teledyne parties have advised OEHHA that they still wish to arbitrate the matter. Should OEHHA now overrule TCI's and the other respondents' objections to the convening of the panel, TCI may take legal action to dispute the panel's jurisdiction and in all events will vigorously maintain that it is not responsible for any of the groundwater contamination in the area and should not share in any of the costs associated with the groundwater extraction system being operated by Teledyne/Spectra Physics.
At present, there is no lawsuit, arbitration or other legal or administrative proceeding pending against TCI regarding this Teledyne/Spectra Physics matter, and it is possible that no further legal proceedings regarding this matter involving TCI will occur. The Company cannot estimate the costs, if any, that will be required in the resolution of this matter.
The Company is from time to time involved in routine litigation or threatened litigation arising from the ordinary course of its business. Such matters, if decided adversely to the Company, would not, in the opinion of management, have a material adverse effect on the financial condition of the Company.
TCI INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES The Company has net operating loss carryforwards for federal and state income tax purposes of approximately $7,570,013, $2,628,952, respectively, which expire through 2014 and 2004, respectively.
The provision for income taxes, all current, for the years ended September 30, 2000, 1999, and 1998, consist of the following:
The effective tax rate differed from the statutory federal income tax rate due to the following:
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss and tax credit carryforwards. Significant components of the Company's net deferred taxes are as follows:
A valuation allowance has been recorded for the entire deferred tax asset as a result of uncertainties regarding the realization of the asset due to the lack of consistent earnings history for the Company. The net change in the total valuation allowance for the years ended September 30, 2000 and September 30, 1999 was decrease of $1,941,000 and an increase of $898,000, respectively.
Cash payments for income taxes were $55,744 in 2000 and $0 in 1999.
TCI INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. OPERATING SEGMENTS The Company is structured primarily around its product lines and the markets it serves and operates in two business segments: Broadcast Products and Signal Processing Products.
The Broadcast Products segment designs and manufactures antenna systems and accessory items that cover the frequency range of 0.5 to 870 MHz. Most of the Company's products are used for TV, FM, and AM broadcasting, although lower-power versions of its products in the 2 to 30 MHz range are used for high frequency (HF) communications by military and commercial organizations. These systems are installed in both domestic and foreign locations for both government and commercial organizations.
The Company's Signal Processing Products segment offers spectrum management, direction finding, signal collection, and specialized communications equipment that are sold primarily to domestic and foreign military and intelligence markets. Typically, Signal Processing products consist of receivers and transmitters, DSP-based direction finding processors, and specialized application software.
Selected information by operating segments is summarized below (in thousands):
Pursuant to the requirements to Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TCI International, Inc.
Date: December 29, 2000 By: /s/ MARY ANN ALCON ---------------------------- -------------- MARY ANN ALCON Chief Financial Officer (Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
TCI INTERNATIONAL, INC.
EXHIBIT INDEX
Number Exhibit - --------------------------------------------------------------------------------
10.11 Sublease between Technology for Communications International and Fairchild Technologies, dated May 1, 2000
22 Schedule II - Valuation and Qualifying Accounts
23 List of Subsidiaries of TCI International, Inc.
24 Consent of KPMG LLP
27 Financial Data Schedule