UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF 	 	 THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF 	 	THE SECURITIES EXCHANGE ACT OF 1934 For the transition period N/A Commission file number:			0-10877 TCI INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware					 94-3026925 (State of other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 								 222 Caspian Drive, Sunnyvale, California 94089-1014 (Address of principal executive offices) (Zip Code) (408)747-6100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ As of June 30, 1998, 3,209,915 shares of Common Stock were outstanding. TCI INTERNATIONAL, INC. TABLE OF CONTENTS 	Part I - Financial Information					 Page 	Item 1. Financial Statements 	Condensed Consolidated Statements of Operation	 3 	Condensed Consolidated Balance Sheets				 4 	Condensed Consolidated Statement of Cash Flows		 5 	Notes to Financial Statements					 6-7 	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation	 8-13 	Part II - Other Information 	Item 6. Exhibits and Reports on Form 8-K			 14 	Signatures							 15 TCI INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATION (In thousands, except per share amounts) 							 (Unaudited) (Unaudited) Three Months Ended Nine Months Ended June 30, June 30, Revenue	 $5,814 $5,822 	 $20,898 $25,962 Operating costs and expenses: Cost of revenue	 3,796 8,757	 13,738	 22,457 Marketing, general and	 Administrative 2,886 2,671	 8,325	 9,126 	 6,682 11,428 22,06	 31,583 Loss from operations (868) (5,606) (1,165) (5,621) Investment income, net 166	 296 591	 988 Loss before provision for income taxes (702) (5,310) (574)	 (4,633) Provision for income taxes	 0 (173) 38	 44 Net loss	 $(702) $(5,137) $(612) 	$(4,677) Basic and diluted net loss, per share	 $(.22) $(1.61) $(.19) $(1.47) Shares used in per share computation	 3,209 3,199 3,205 3,191 See accompanying Notes to Condensed Consolidated Financial Statements. TCI INTERNATIONAL, INC. 			CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands except per share amounts) 	 June 30,		 September 30, 	 1998 	 1997 	 	 (Unaudited) ASSETS Current Assets Cash and cash equivalents	 $ 4,950 	$10,439 (Includes restricted cash of $1,547 on June 30,1998 $6,420 on Sept 30, 1997) Short-term investments	 5,847	 4,089 Accounts receivable - Billed 	1,203	 1,234 Unbilled 7,825 8,970 Inventories	 1,331	 2,118 Prepaid expenses	 2,705	 967 Total current assets	 23,861	 27,817 Property and equipment, net 	 1,652	 1,623 Other assets	 629	 426 Total assets	 $26,142 	$29,866 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable 	$ 915	 $3,560 Customer deposits and billings on uncompleted contracts in excess of revenue recognized 1,374 	1,019 Accrued liabilities	 3,892	 4,738 Total current liabilities	 6,181	 9,317 Stockholders' equity: Common stock, par value $.01; authorized 5,000 shares; issued and outstanding 3,281 shares	 11,780 	11,780 Retained earnings	 8,503 9,124 Valuation allowance-short-term investments	 (3)	 (4) Treasury shares at cost; 71 and 79 shares at Jun. 30, 1998 and Sept 30, 1997, respectively	 (319)	 (351) Total stockholders' equity	 19,961	 20,549 Total liabilities and stockholders' equity	 $26,142	 $29,866 See accompanying Notes to Condensed Consolidated Financial Statements. TCI INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended June 30, (In thousands) 							 1998 	 1997 							 Cash provided by (used in): Operations: 	Net loss 	$(613) 	$(4,677) 	Reconciliation to cash provided by operations: 	Depreciation	 369 	524 	Changes in assets and liabilities: 	Accounts receivable	 1,176	 (1,332) 	Inventories	 787	 2,328 	Prepaid expenses	 (1,941)	 262 	Accounts payable	 (2,645)	 (2,366) 	Customer deposits/billing in excess of revenue	 355 (1,854) 	Accrued liabilities	 (846)	 496 Cash used in operations	 (3,358)	 (6,619) Investing activities: 	Purchases of property and equipment	 (398)	 (624) 	Purchases of short-term investments	 (5,865)	 (5,900) 	Proceeds from sale of investments	 4,107	 11,749 Cash provided by investing activities	 (2,156)	 5,225 Financing activities: 	Stock options exercised	 25	 68 Cash provided by financing activities	 25	 68 Net decrease in cash and cash equivalents	 (5,489)	 (1,326) Cash and cash equivalents at beginning of period	 10,439	 7,249 Cash and cash equivalents at end of period 	 $4,950	 $5,923 See accompanying Notes to Condensed Consolidated Financial Statements TCI INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 Basis of Presentation The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes the information included herein, when read in conjunction with the financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended September 30, 1997, filed with the Securities and Exchange Commission, to be not misleading. Further, the following financial statements reflect, in the opinion of management, all adjustments necessary (consisting of normal recurring entries) to present fairly the financial position and results of operations as of and for the periods indicated. The results of operations for the nine months ended June 30, 1998, are not necessarily indicative of results to be expected for the entire year ending September 30, 1998. Note 2 Inventories consist of the following (in thousands): 	 June 30, 	 September 30 1997 1998 	Material and component parts	 $1,094 $1,535 	Work in process		 237 583 		 $1,331 $2,118 Note 3 At June 30, 1998 there were outstanding standby letters of credit of approximately $3,122,000 serving as bid, performance and payment bonds. The standby letters of credit expire at various dates through 2000; however, certain performance bonds are automatically renewable until canceled by the beneficiary. These outstanding standby letters of credit are fully secured by the Company's cash or short term investment portfolio. Note 4 Net Income Per Share Basic net income per share is computed using the weighted average number of common shares outstanding. Diluted net income per share is computed using the weighted average number of common shares outstanding and dilutive common share equivalents from the assumed exercise of options outstanding during the period, if any, using the treasury stock method. No common equivalent shares are included for loss periods as they would be anti- dilutive. Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated and accounted for as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. For a derivative not designated as hedging instrument, changes in the fair value of the derivative are recognized in earnings in the period of change. This statement will be effective for all annual and interim periods beginning after June 15, 1999, and management does not believe the adoption of SFAS No. 133 will have a material effect on the financial position of the Company. TCI INTERNATIONAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Third Fiscal Quarter and Nine Months ended June 30, 1998 Compared to Third Fiscal Quarter and Nine Months ended June 30, 1997 Except for historical information contain herein, the matters discussed in this report contain forward-looking statements that involve risks and uncertainties which could cause future results to differ materially. Revenue for the third quarter of fiscal year 1998 was $5,814,000, similar to the revenue of $5,822,000 for the same period a year ago. Revenue for the first nine months of fiscal year 1998, however, was $20,898,000 compared to $25,962,000 for the same period in fiscal year 1997 reflecting a decrease of 20%. This decrease is due to a lower level of business activity attributable to a fewer number of contracts being executed by the Company. Because the Company is experiencing a delay in obtaining acceptance under one significantly-sized overseas contract, corresponding recognition of revenue and associated gross margin on this contract has been delayed. This delay has had a negative impact on revenue for the third quarter. This delay may extend into the first quarter of fiscal year 1999. Although there can be no assurance, it is management's opinion that the delay in receipt of customer acceptance will be satisfactorily addressed during the next six months and that the current budget for this contract is adequate to complete the contract obligations. Gross margin expressed as a percentage of revenue for the third quarter of fiscal year 1998 was 35% compared to (51)% in the third quarter of fiscal year 1997. Gross margin percentage for the first nine months of fiscal year 1998 was 34% compared to 14% for the same period in fiscal year 1997. The gross margin percentage for the third quarter and the first nine months of fiscal year 1998 is substantially higher than in fiscal year 1997 due to the 1997 third quarter booking of an inventory valuation adjustment of approximately $2,500,000 and unfavorable budget adjustments made to various long-term contracts. The inventory valuation adjustment of $2,500,000 was deemed necessary due largely to decreased customer demand for the existing BR Communications product line. Additionally, budget adjustments were made to various long-term contracts in the broadcast antenna and spectrum management product line to reflect previously unexpected increases in cost to complete estimates for these contracts. The Company continues to experience competitive pricing pressure for new business world-wide, but especially in Asia and Latin America. More specifically, the Company is experiencing delays in the receipt of certain expected orders in South Asia due to the political uncertainties brought about by the recent nuclear test activities within the region. The Company's ability to generate consistent revenue growth remains contingent upon its ability to secure adequate levels of new business from its core product and new business initiatives. The Company expects total revenue for fiscal year 1998 to be lower than revenues recognized during fiscal year 1997. On July 20, 1998, the Company announced its engagement of Gerken Capital, Associates, an investment banking firm, to assist management in the active exploration of various means to enhance shareholder value. Management is committed to implementing a strategy to acquire, merge with, buy, or sell business units that in these forms more rapidly advance the long-term interests of its shareholders. In this regard, synergistic business relationships with its two largest product areas, broadcast antenna products, and the signal collection, direction finding groups are being actively and aggressively explored. It is management's view that long-term growth and profitability objectives will be more easily achieved with a set of strong strategic relationships with entities where common expenses are shared and mutual technology efforts can be effectively leveraged in diverse markets. Marketing, general and administrative expense for the third quarter of fiscal year 1998 was $2,886,000 compared to $2,671,000 for the same period a year ago, an increase of $215,000. This increase is the result of the Company's continuous investment in independent research and development activities. However, marketing, general and administrative expenses for the first nine months of fiscal year 1998 decreased by $801,000 when compared to the same period a year ago. This decrease is largely due to smaller representative commission expenses being accrued during the current fiscal year due to changes in the mix of foreign and domestic business and the specific sales channels through which the company's products are sold. Investment income for the current quarter was $166,000 compared to $296,000 for the same quarter a year ago. Investment income for the first nine months of the current fiscal year decreased by $397,000 compared to the same period in fiscal year 1997 due to a lower cash and short-term investment balance. There was no income tax provision recorded during the current quarter as a result of the Company's plan to utilize its net operating loss carryforward to offset any tax liability for the current fiscal year. The Company's total backlog at June 30, 1998 was $18 million compared to $23 million at September 30, 1997. The total funded portion of the Company's backlog at June 30, 1998 was $18 million compared to $20 million at September 30, 1997. The Company's funded backlog excludes unfunded and unexercised options. The results of operations for the first nine months in fiscal year 1998 are not necessarily indicative of future quarterly or annual performance expectations. FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS The Company operates in a highly competitive environment that involves a number of risks, some of which are beyond the Company's control. The following discussion highlights some of these risks. Fluctuations in Operating Results The Company's operating results may fluctuate from quarter to quarter and year to year for a number of reasons. While there is no seasonality to the Company's business, because of the Company's relative small size, combined with the extended delivery cycles of its long-term project-oriented business, revenue and accompanying gross margins are inherently difficult to predict. While the Company records revenue on a percentage of completion basis, unexpected changes in project budgets during the course of execution can cause revenue and accompanying gross margins to vary from quarter to quarter. Because the Company plans its operating expenses, many of which are relatively fixed in the short term, based on the assumption of stable performance, a relatively small revenue shortfall may cause profitability from operations to suffer. Historically, the Company has endured periods of volatility in its revenue results due to a number of factors, including shortfalls in new orders, delays in the availability of new products, delays in subcontractor provided materials and services, and delays associated with foreign construction activities. Gross margins are strongly influenced by a mix of considerations, including pressures to be the low price supplier in competitive bid solicitations, the mix of contract material and non-recurring engineering services, and the mix of newly developed and existing product sold to various customers. The Company believes these historical challenges will continue to affect its future business. The Company intends to effect its product and market diversification strategy by leveraging its expertise in RF technology applications and its ability to conduct business in foreign countries in the pursuit of outside technology and business acquisitions which complement various characteristics of its existing core business. Combined with the operating pressures detailed above, the Company expects that the future cost of this product diversification strategy may be significant enough to generate a loss from operations during fiscal year 1998. Managing of Changing Business The Company is in the process of adopting a business management plan that includes substantial investments in its sales and marketing organizations, increased funding of existing internal research and development programs, and certain investments in corporate infrastructure that will be required to support the Company's diversification objectives during the next three years. Accompanying this process are a number of risks, including a higher level of operating expenses, the difficulty of competing with companies of larger size for talented technical personnel, and the complexities of managing a changing business. There also exists the risk the Company may inaccurately estimate the viability of any one or all of its diversification efforts and as a result, may experience substantial revenue shortfalls of a size so significant as to generate losses from operations. Risk Associated with Expansion into Additional Markets and Product Development The Company believes that its future success is substantially dependent on its ability to successfully acquire, develop and commercialize new products and penetrate new markets. In addition to the Company's ongoing efforts to diversify its product offerings within its core businesses such as the spectrum management system business, the Company intends to pursue a diverse, but focused product and market development initiative during the next three years. The Company believes that its general knowledge of RF technology and its related applications combined with its ability to conduct business in overseas markets can be exploited to return the Company to an aggressive growth posture. While not strictly limited to these product areas, the Company is currently pursuing various rural communication and telephony applications using its proprietary technology, certain transmitter product initiatives in the FM, HDTV and wireless cable TV markets which compliment the Company's antenna expertise, and certain RF technologies with potential application in the markets of tracking various kinds of assets in indoor and outdoor settings. There can be no assurance that the Company can successfully develop these or any other additional products, that any such products will be capable of being produced in commercial quantities at reasonable cost, or that any such products will achieve market acceptance. Should the Company expend funds to acquire outside entities or technology, there can be no assurance that sufficient returns will be realized to offset these investments. The inability of the Company to successfully develop or commercialize new products or failure of such products to achieve market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations. Risks Associated with Conducting Business Overseas A substantial part of the Company's revenue are derived from fixed priced contracts with foreign governmental entities. With increasing frequency, the Company finds a demand for its products in third world countries and developing nations which have an inherently more volatile and uncertain political and credit risk profile than the U.S. Government market with which the Company is accustomed to conducting its business. While the Company seeks to minimize the collection risks on these contracts by normally securing significant advanced payments with the balance secured by irrevocable letters of credit, the Company cannot always be assured of receiving full payment for work that it has performed due to unforeseen credit and political risks . Should such a default on payments owed the Company ever occur, a significant effect on earnings, cash flows and cash balances may result. Competition Most all of the Company's products are positioned in niche markets which include strong elements of imbedded proprietary technology. In most of these markets, the Company competes with companies of significantly larger size, many of whom have substantially greater technical, marketing, and financial resources compared to similar resources available within the Company. This type of competition has resulted in and is expected to continue to result in significant price competition. Impact of Year 2000 Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. As a result, in approximately a year and a half, computer systems and/or software used by the Company may need to be upgraded to comply with such "Year 2000" requirements. The Company has been assessing the impact of Year 2000 issues on its computer systems and applications. The Company plans to finish its assessment in the next three months. A remediation plan will be established with a target date of being full compliant by June 30, 1999. The Company is also taking into consideration any effect critical supplier and customers and their status of Year 2000 issues would have on compliance program. The Company believes that any future costs relating to the Year 2000 issue will not have a material impact on the Company's consolidated financial position, results of operations or cash flow. Significant uncertainty exists concerning the potential effects associated with compliance. Although the Company believes that it will be Year 2000 compliant, there can be no assurance that coding errors or other defects will not be discovered in the future. Any Year 2000 non-compliance could result in a material adverse effect on the Company's business, financial conditions and operating results. 	TCI INTERNATIONAL, INC. LIQUIDITY AND CAPITAL RESOURCES Consolidated cash, cash equivalents and marketable securities totaled $10,797,000 at June 30, 1998, compared to $14,528,000 at September 30, 1997. The Company currently believes that its cash, cash equivalents and short-term investments, together with expected revenue from operations, will be sufficient to fund its operations through fiscal year 1999. A significant portion of the Company's sales is associated with long-term contracts and programs in which there are significant inherent risks. These risks include the uncertainty of economic conditions, dependence on future appropriations and administrative allotments of funds, changes in governmental policies, difficulty of forecasting costs and work schedules, product obsolescence, and other factors characteristic of the industry. Contracts with agencies of the U.S. Government or with prime contractors working on U.S. Government contracts contain provisions permitting termination at any time for the convenience of the Government. No assurance can be given regarding future financial results as such results are dependent upon many factors, including economic and competitive conditions, incoming order levels, shipment volume, product margins and foreign currency exchange rates. The large size of certain of the Company's orders makes it possible that a single contract termination, cancellation, delay, or failure to perform could have a significant adverse effect on revenue, results of operations, and the cash position of the Company. A portion of the Company's revenue are derived from governments in areas of political instability. The Company generally attempts to reduce the risks associated with such instability by requesting advance payment if appropriate, as well as letters of credit or central government guarantees. Most of the Company's overseas contracts provide for payments in U.S. dollars. However, in certain instances the Company, for competitive reasons, must accept payment in a foreign currency. At June 30, 1998, the Company has standby letters of credit outstanding of approximately $3,122,000 serving as bid, performance and payment bonds. The standby letters of credit are collateralized by the Company's cash or short-term investments. TCI INTERNATIONAL, INC. PART II OTHER INFORMATION Item 6.	Exhibits and Reports on Form 8-K a.	Exhibits: 			Exhibit 27.1-Financial Data Schedule b.	Reports on Form 8-K: 	None No other applicable items. TCI INTERNATIONAL, INC. PART II OTHER INFORMATION SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 							 TCI INTERNATIONAL, INC. 					 			 (Registrant) 						 	Mary Ann W. Alcon 		Date				 		 Chief Financial Officer 						 (Duly authorized officer of the registrant and principal financial officer of the registrant)