<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1923 for the quarterly period ended July 1, 1995 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period to
------------ ----------
Commission File Number: 0-8588
TECHNICAL COMMUNICATIONS CORPORATION
------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2295040
------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Domino Drive, Concord, MA 01742-2892
------------------------------ ----------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 508-287-5100
------------
N/A
----------------------------------------------------
(Former name, former address and formal fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Number of shares of
Common Stock, $.10 par value, outstanding as of August 1, 1995:
1,253,176.
<PAGE>
INDEX
Page
----
PART I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets,
July 1, 1995 and October 1, 1994 1
Condensed Consolidated Statements of Operations,
three months and nine months ended July 1, 1995
and July 2, 1994 2
Condensed Consolidated Statements of Cash Flows,
nine months ended July 1, 1995 and July 2, 1994 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II Other Information 8
Signatures 9
<PAGE>
PART I. Financial Information - Item 1. Financial Statements
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
July 1, 1995 October 1, 1994
(Unaudited)
------------- ---------------
<S> <C> <C>
Assets
------
Current Assets:
Cash and cash equivalents $ 3,745,996 $ 6,460,887
Accounts receivable - trade, less allowance
for doubtful accounts of $15,000
at 7/1/95 and 10/1/94 2,559,942 3,177,961
Inventories (Note 2) 3,300,320 1,423,430
Refundable and prepaid income taxes 38,944 84,340
Other current assets 459,953 88,852
----------- -----------
Total current assets $10,105,155 $11,235,470
----------- -----------
Equipment and leasehold improvements 3,711,766 2,256,684
Less: accumulated depreciation and amortization 1,808,679 1,549,551
----------- -----------
1,903,087 707,133
----------- -----------
Goodwill, net of amortization 1,187,655 -
Other assets 723,923 146,352
----------- -----------
$13,919,820 $12,088,955
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities:
Accounts payable $ 306,099 $ 223,638
Long-term debt - current portion (Note 3) 696,136 246,136
Accrued liabilities:
Compensation and related expenses 413,958 307,388
Customer deposits and other 906,072 859,675
----------- -----------
Total current liabilities $ 2,322,265 $ 1,636,837
----------- -----------
Long-term debt (Note 3) 2,519,208 941,311
Other long-term liabilities 191,437 191,437
Stockholders' Equity:
Common stock, par value $.10 per share;
authorized 3,500,000 shares; issued and
outstanding 1,253,176 shares at 7/1/95
and 1,251,176 shares at 10/1/94 125,318 125,118
Treasury stock at cost, 10,000 shares (80,000) (80,000)
Additional paid-in capital 1,384,052 1,374,752
ESOP deferred compensation (Note 3) (1,002,845) (1,187,447)
Retained earnings 8,460,385 9,086,947
----------- -----------
Total stockholders' equity 8,886,910 9,319,370
----------- -----------
$13,919,820 $12,088,955
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
---------------------------------------------------------------------------
financial statements.
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Page 1
<PAGE>
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
------------- -----------------
July 1, 1995 July 2, 1994 July 1, 1995 July 2, 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales $2,900,841 $2,669,048 $4,824,406 $5,081,214
Cost of Sales 1,034,960 1,009,273 2,372,575 2,339,501
---------- ---------- ---------- ----------
Gross Profit 1,865,881 1,659,775 2,451,831 2,741,713
---------- ---------- ---------- ----------
Operating Expenses:
Selling, general and
administrative expenses 899,323 1,117,178 2,359,998 2,782,375
Product development costs 427,517 218,524 987,914 868,500
---------- ---------- ---------- ----------
1,326,840 1,335,702 3,347,912 3,650,875
---------- ---------- ---------- ----------
Operating Profit (Loss) 539,041 324,073 (896,081) (909,162)
---------- ---------- ---------- ----------
Other Income (Expense)
Interest Income 79,964 54,661 230,017 151,787
Interest Expense (41,072) (28,030) (86,394) (86,840)
Other Expense (96,751) (96,751)
Other Income 606 5,289 13,793 15,344
---------- ---------- ---------- ----------
(57,253) 31,920 60,665 80,291
---------- ---------- ---------- ----------
Income (Loss) Before
Income Taxes 481,788 355,993 (835,416) (828,871)
Income Taxes 120,452 81,910 (208,854) (153,688)
---------- ---------- ---------- ----------
Net Income (Loss) $ 361,336 $ 274,083 $ (626,562) $ (675,183)
========== ========== ========== ==========
Earnings (Loss) Per
Common Share:
(Note 1) $.29 $.22 $(.50) $(.54)
Weighted Avg. Shares Used
in Computation 1,252,889 1,249,846 1,252,146 1,243,495
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
---------------------------------------------------------------------------
financial statements.
---------------------
Page 2
<PAGE>
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
July 1, 1995 July 2, 1994
------------- -------------
<S> <C> <C>
Operating Activities:
Net Loss $ (626,562) $ (675,183)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 259,128 206,520
Non-cash compensation associated with ESOP 184,602 223,183
----------- -----------
(182,832) (245,480)
Changes in Assets and Liabilities:
Decrease in accounts receivable 618,019 2,798,912
Increase in inventories (1,876,890) (659,162)
Decrease in prepaids and refundable income taxes 45,396 59,625
Increase in other current assets (371,101) (53,481)
Decrease in accrued and deferred
income taxes (236,360) (185,558)
Decrease (increase) in other assets (577,571) (1,348)
Net increase in goodwill (1,187,655) -
Increase in accounts payable
and accrued liabilities 471,787 304,257
----------- -----------
(3,114,375) 2,263,245
Net cash provided by operating activities (3,297,207) 2,017,765
Investing Activities:
Additions to equipment and leasehold improvements (1,455,082) (89,615)
----------- ---------
Net cash (used) by investing activities (1,455,082) (89,615)
Financing Activities:
Proceeds from exercise of stock options 9,500 63,600
Payment of ESOP debt (184,602) (223,183)
Net increase in debt due to Datotek acquisition 2,212,500 -
----------- -----------
Net cash (used) by financing activities 2,037,398 (159,583)
Net increase (decrease) in cash and cash
equivalents (2,714,891) 1,768,567
Cash and cash equivalents at beginning of year 6,460,887 5,708,842
----------- -----------
Total cash and cash equivalents at the
end of the third quarter $ 3,745,996 $ 7,477,409
=========== ===========
Supplemental disclosures:
Interest paid $ 86,394 $ 86,840
Income taxes paid (net of refunds received) (9,710) (88,467)
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
---------------------------------------------------------------------------
financial statements.
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Page 3
<PAGE>
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
STATEMENT OF FAIR PRESENTATION
------------------------------
The financial information included herein is unaudited. In addition, the
financial information does not include all disclosures required under generally-
accepted accounting principles because certain note information included in the
Company's annual audited financial statements in the annual report to
shareholders has been omitted from this report. The information herein should,
therefore, be read in conjunction with the prior year's annual report. However,
the financial information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the results for the interim period. The Company considers
the disclosures adequate to make the information presented not misleading.
NOTE 1. Earnings Per Share
------- ------------------
For the quarters and nine month ended July 1, 1995 and July 2, 1994, net
earnings per common share were based on the weighted average number of shares
outstanding during the period, since the effect of assumed conversion of
dilutive employee stock options was not material.
NOTE 2. Inventories
--------- -----------
Inventories consisted of the following:
<TABLE>
<CAPTION>
July 1, 1995 October 1, 1994
------------ ---------------
<S> <C> <C>
Raw Materials $1,485,144 $ 772,791
Work in Process 924,090 650,639
Finished Goods 891,086 -
---------- ----------
$3,300,320 $1,423,430
---------- ----------
</TABLE>
NOTE 3. Long-Term Debt
------- --------------
As of July 1, 1995, the Company has a $2,500,000 line of credit at a rate of
prime plus one-half of 1%. On May 31, 1995 this line was reduced from $3,500,000
to $2,500,000. This reduction is not expected to affect the Company's
operations. This line of credit is secured by a pledge of substantially all the
assets of the Company and matures on May 1, 1996. Availability under the line of
credit has been reduced by $29,689 for outstanding standby letters of credit (as
of July 1, 1995). Other than these standby letters of credit, the Company had no
borrowings under the line of credit at July 1, 1995.
On November 17, 1989, the Company established the Technical Communications
Corporation Employees Stock Ownership Trust (the Trust) for the benefit of its
Associates. During 1990 and 1991, the Trust borrowed $1,212,500 and $1,287,488,
respectively, from two banks, and purchased 190,350 shares of the Company's
common stock at fair market value. The Company is acting as a guarantor on the
outstanding loans and, as a result, has recorded the principal balance of such
loans on its balance sheet as short-term and long-term debt with an offsetting
charge to "ESOP Deferred Compensation" within the Stockholders' Equity section.
The 1990 loan to the Trust bears interest on the principal amount outstanding at
a rate equal to a) 7.25% to March 31, 1996, and b) prime plus 1/2 of 1% as of
April 1, 1996, to March 31, 1997. The 1991 loan was renewed in August 1994 for
a further three-year term, and now bears interest at a rate of 8.77%. It
requires a balloon payment of approximately $460,000 in August 1997.
Page 4
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
----------------------------------------------------------------
Except for the possibility of refinancing the renewed August 1994 loan at or
before maturity, the Company intends to make contributions to the Trust
sufficient to pay all principal and interest on the loans when due. Because the
payment of principal results in the release of shares from collateral, which
shares are then available for allocation to Associates, the principal portion of
these contributions is recorded as compensation expense. Such contributions are
therefore expensed to compensation and interest when they are made or accrued.
NOTE 4. Investments
------- -----------
On May 31, 1995, the Company completed an asset purchase of the secure
communications business of Datotek, Inc., a subsidiary of AT&T Corp., for
approximately $4,069,000, subject to final price adjustments. These adjustments
will be finalized by September 30, 1995. The purchase price was allocated based
in the estimated fair value of net assets acquired (accounts receivable,
inventory, plant, property and equipment, other currents assets, accounts
payable and accrued warranty) and resulted in $1,201,000 of goodwill. Goodwill
is being amortized over 7 1/2 years. This acquisition was funded partly by the
Company's own capital and partly through loans amounting to $2,250,000 from two
banks. These loans are payable in equal installments of principal over a period
of five years, plus interest at The First National Bank of Boston's prime rate
plus 1/2 of 1%.
On June 27, 1995, the Company also invested $250,000 for a minority interest in
non-voting preferred stock of Net2net Corporation. Net2net Corporation, a high-
technology start-up company based in Hudson, MA, is a leader in the development
of high performance management and analysis systems for Asynchronous Transfer
Mode networks. The Company has also entered into an OEM agreement with Net2net
Corporation to distribute Net2net's asynchronous transfer mode (ATM) network
analysis and management system on an exclusive basis to certain U. S. government
departments. The equity investment and the OEM agreement gives the Company the
opportunity to establish a position in this emerging market and benefit from
related sales opportunities over the long-term.
NOTE 5. Commitments and Contingencies
------- -----------------------------
The Company is not currently party to any lawsuit, and is not aware of any
pending legal proceedings. See Part II, "Other Information," Item 1, "Legal
Proceedings."
Page 5
<PAGE>
PART I, Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
---------------------
The Company is in the business of designing, manufacturing and marketing
communications security equipment. The Company receives orders for equipment
from customers which may take several months or longer to manufacture and ship.
Because the Company recognizes income on such contracts only when products are
ready for shipment, revenues may vary widely from quarter to quarter. Quarterly
comparisons of revenue may therefore not be indicative of any trend.
The Company's backlog of firm orders as of July 1, 1995 was $1,870,000,
representing a 5% increase from $1,777,872 as of October 1, 1994. This increase
was primarily as a result of the asset acquisition purchase of the secured
communications business of Datotek, Inc., a subsidiary of AT&T Corp. which
included backlog. The Company expects to deliver the majority of its backlog in
the current fiscal year.
Net sales for the quarter ended July 1, 1995 and July 2, 1994, were $2,900,841
and $2,669,048, respectively. For the nine months ended July 1, 1995 and July 2,
1994 net sales were $4,824,406 and $5,081,214, respectively. The increase in
the third quarter was due to the variability of quarterly shipments explained
above and the shipment of a large foreign order. The slight decrease in the
nine months ended was due to the variability of quarterly shipments. The
Company anticipates that the pattern of uneven quarterly revenue generation will
continue in fiscal year 1995.
Gross profit for the third quarter of fiscal year 1995 was $1,865,881, as
compared to gross profit of $1,659,775 in the third quarter of fiscal year 1994.
Gross profit for the first nine months of fiscal year 1995 was $2,451,831, as
compared to gross profit of $2,741,713 for the nine months of fiscal year 1994.
This represented a 11% decrease in gross profit. Gross profit expressed as a
percentage of sales was 64% in the third quarter and 51% for the nine months of
fiscal year 1995, as compared to 62% in the third quarter and 54% for the first
nine months of fiscal year 1994. The difference can be attributed to mixes of
product sold in these periods. Since a considerable portion of manufacturing
costs is relatively fixed, decreases in net sales result in decreases in margin
percentage.
Operating expenses for the third quarter and first nine months of fiscal 1995
were $1,326,840 and $3,347,912, respectively. This is in comparison to the
operating expenses in the third quarter and nine months of fiscal 1994, which
were $1,335,702 and $3,650,875, respectively. Despite added costs incurred as a
result of the secured communications business of Datotek, Inc., management's
efforts to reduce expenses have continued to bear fruit.
After-tax income for the third quarter was $361,336 or $.29 per share, while
after-tax loss for the first nine months of fiscal year 1995 was $626,562 or
$.50 per share. This compares to after-tax income of $274,083 or $.22 in the
third quarter and an after-tax loss of $675,183 or $.54 per share for the first
nine months of fiscal year 1994, respectively. The increase in quarterly income
was a result of higher revenues and lower costs compared to those of the same
period last fiscal year.
Page 6
<PAGE>
Management's Discussion and Analysis (continued)
------------------------------------------------
Liquidity and Capital Resources
-------------------------------
Cash and short-term investments as of July 1, 1995 decreased by $2,714,891
or 42% to $3,745,996 from a balance of $6,460,887 at October 1, 1994. The
decrease is primarily due to the purchase of the secure communications business
of Datotek, Inc., a subsidiary of AT&T Corp., on May 31, 1995. Inventories were
$3,300,320 as of July 1, 1995, representing a 132% increase from the October 1,
1994 balance of $1,423,430, this increase is due primarily to the purchase of
the secured communications business of Datotek, Inc. The current ratio is 4.4:1,
compared to 6.9:1 as of October 1, 1994. This decrease is due to a reduction in
cash and short-term investments and an increase in the current portion of long-
term debt primarily due to the purchase of the secured communications business
of Datotek, Inc.
As of July 1, 1995, the Company had a $2,500,000 line of credit at a rate of
prime plus one-half of 1%. This line of credit is secured by a pledge of
substantially all the assets of the Company and matures on May 1, 1996.
Availability under the line of credit has been reduced by $29,689 for
outstanding standby letters of credit (as of July 1, 1995). Other than these
standby letters of credit, the Company had no borrowings under the line of
credit at July 1, 1995.
On November 17, 1989, the Company established the Technical Communications
Corporation Employees' Stock Ownership Trust (the Trust) for the benefit of its
Associates. During 1990 and 1991, the Trust borrowed $1,212,500 and $1,287,488,
respectively, from two banks, and purchased 190,350 shares of the Company's
common stock at fair market value. The Company is acting as a guarantor on the
outstanding loans and, as a result, has recorded the principal balance of such
loans on its balance sheet as short-term and long-term debt with an offsetting
charge to "ESOP Deferred Compensation" within the Stockholders' Equity section.
On May 31, 1995, the Company completed an asset purchase of the secure
communications business of Datotek, Inc., for approximately $4,069,000, subject
to final price adjustments. These adjustments will be finalized by September
30, 1995. The purchase price was allocated based in the estimated fair value of
net assets acquired (accounts receivable, inventory, plant, property and
equipment, other currents assets, accounts payable and accrued warranty) and
resulted in $1,201,000 of goodwill. Goodwill is being amortized over 7 1/2
years. This acquisition was funded partly by the Company's own capital and
partly through loans amounting to $2,250,000 from two banks. These loans are
payable in equal installments of principal over a period of five years, plus
interest at The First National Bank of Boston's prime rate plus 1/2 of 1%.
On June 27, 1995, the Company also invested $250,000 for a minority interest in
non-voting preferred stock of Net2net Corporation. Net2net Corporation, a high-
technology start-up company based in Hudson, MA, is a developer of high
performance management and analysis systems for Asynchronous Transfer Mode
networks. The Company has also entered into an OEM agreement with Net2net
Corporation to distribute Net2net's asynchronous transfer mode (ATM) network
analysis and management system on an exclusive basis to certain U. S. government
departments. The stock purchase and the OEM agreement gives the Company the
opportunity to establish a position in this emerging market and benefit from
related sales opportunities over the long-term.
The Company believes that its cash and cash equivalent, borrowing capability and
operating cash flow will be sufficient to operate the business for the next 12
months.
Page 7
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
No material legal proceedings are pending to which the Company is a
party or of which any of its property is the subject.
Item 2. Changes in Securities:
a. Reports on Form 8-K
Item 2-On May 31, 1995 the Company acquired certain assets of the
-------
secured communications business of Datotek, Inc., a subsidiary of
AT&T Corp.
Item 3. Defaults Upon Senior Securities:
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders:
Item 5. Exhibits and Reports on Form 8-K:
a. Exhibits - Statement regarding computation of per-share earnings:
reference is made to Note 1 of the Notes to the Condensed
Consolidated Financial Statements on page 4 of this Quarterly
Report on Form 10-Q.
Page 8
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
TECHNICAL COMMUNICATIONS CORPORATION
------------------------------------
(Registrant)
August 14, 1995 By: /s/ Roland S. Gerard
--------------- -----------------------------
Date ROLAND S. GERARD, PRESIDENT
August 14, 1995 By: /s/ Graham R. Briggs
--------------- -----------------------------
Date GRAHAM R. BRIGGS,
VICE PRESIDENT AND
CHIEF ACCOUNTING OFFICER
Page 9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> JUL-01-1995
<CASH> 3,745,996
<SECURITIES> 0
<RECEIVABLES> 2,559,942
<ALLOWANCES> 0
<INVENTORY> 3,300,320
<CURRENT-ASSETS> 10,105,155
<PP&E> 3,711,766
<DEPRECIATION> 1,808,679
<TOTAL-ASSETS> 13,919,820
<CURRENT-LIABILITIES> 2,322,265
<BONDS> 0
<COMMON> 125,318
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,919,820
<SALES> 4,824,406
<TOTAL-REVENUES> 4,824,406
<CGS> 2,372,575
<TOTAL-COSTS> 5,720,487
<OTHER-EXPENSES> 147,059
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86,394
<INCOME-PRETAX> (835,416)
<INCOME-TAX> (208,854)
<INCOME-CONTINUING> (626,562)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (626,562)
<EPS-PRIMARY> (.50)
<EPS-DILUTED> (.50)
</TABLE>
