<PAGE> 1
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 1934 for the quarterly period ended June 29, 1996 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act 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 IRS Employer Identification Number
incorporation or organization)
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 former 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, 1996: 1,264,496.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets, June
29, 1996 (unaudited) and September 30, 1995 3
Condensed Consolidated Statements of
Operations, Three (3) months ended June 29,
1996 and July 1, 1995 (unaudited); Nine (9)
months ended June 29, 1996 and July 1, 1995 4
(unaudited)
Condensed Consolidated Statements of Cash
Flows, Nine (9) months ended June 29, 1996
and July 1, 1995 (unaudited) 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
PART II. Other Information 10
Signatures 11
</TABLE>
<PAGE> 3
PART I. Financial Information - Item 1. Financial Statements
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 29, 1996 September 30,
(Unaudited) 1995
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $5,377,817 $3,877,790
Accounts receivable - trade, less
allowance for doubtful accounts of
$53,707 at 6/29/96 and $48,692 at 9/30/95 3,133,579 5,011,966
Inventories (Note 2) 3,008,094 2,427,828
Refundable and prepaid income taxes 36,802 139,944
Other current assets 256,759 342,756
----------- -----------
Total current assets $11,813,051 $11,800,284
=========== ===========
Equipment and leasehold improvements 4,065,916 3,626,364
Less: accumulated depreciation and
amortization 2,414,602 1,984,631
----------- -----------
1,651,314 1,641,733
----------- -----------
Goodwill 1,614,131 1,569,620
Less: accumulated amortization 232,896 65,770
----------- -----------
1,381,235 1,503,850
----------- -----------
Other assets 407,815 402,568
----------- -----------
$15,253,415 $15,348,435
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $516,679 $450,650
Long-term debt - current portion (Note 3) 756,620 696,136
Accrued liabilities:
Compensation and related expenses 355,847 429,146
Other 1,406,680 1,553,140
----------- -----------
Total current liabilities $3,035,826 $3,129,072
----------- -----------
Long-term debt (Note 3) $1,762,588 $2,345,175
Other long-term liabilities 205,437 205,437
Stockholders' Equity:
Common stock, par value $.10 per share;
authorized 3,500,000 shares; issued
and outstanding 1,264,496 shares at
6/29/96 and 1,254,426 shares at 9/30/95 126,450 125,443
Treasury stock at cost, 10,000 shares (80,000) (80,000)
Additional paid-in capital 1,473,643 1,388,927
ESOP deferred compensation (Note 3) (756,709) (941,311)
Retained Earnings 9,486,180 9,175,692
----------- -----------
Total stockholders' equity $10,249,564 $9,668,751
----------- -----------
$15,253,415 $15,348,435
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 4
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net Sales $3,889,148 $2,900,841 $9,725,715 $4,824,406
Cost of Sales 1,640,294 1,034,960 4,309,965 2,372,575
---------- ---------- ---------- ----------
Gross Profit 2,248,854 1,865,881 5,415,750 2,451,831
---------- ---------- ---------- ----------
Operating Expenses:
Selling, general and
administrative
expenses 1,470,366 899,323 3,645,068 2,359,998
Product development
costs 463,775 427,517 1,420,373 987,914
---------- ---------- ---------- ----------
1,934,141 1,326,840 5,065,441 3,347,912
---------- ---------- ---------- ----------
Operating Profit (Loss) 314,713 539,041 350,309 (896,081)
---------- ---------- ---------- ----------
Other Income (Expense):
Interest income 61,241 79,964 176,831 230,017
Interest expense (58,530) (41,072) (188,126) (86,394)
Other income (expense) 12,853 (96,145) 25,730 (82,958)
---------- ---------- ---------- ----------
15,564 (57,253) 14,435 60,665
---------- ---------- ---------- ----------
Income (loss) before
income taxes 330,277 481,788 364,744 (835,416)
Income Taxes 45,640 120,452 54,256 (208,854)
---------- ---------- ---------- ----------
Net Income (Loss) $284,637 $361,336 $310,488 $(626,562)
========== ========== ========== ===========
Earnings (Loss) Per
Common Share: (Note 1) $ .23 $ .29 $ .25 $(.50)
Weighted Avg. Shares
Used in Computation 1,257,783 1,252,889 1,255,545 1,252,146
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 5
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 29, 1996 July 1, 1995
<S> <C> <C>
Operating Activities:
Net income (loss) $ 310,488 $ (626,562)
Adjustments to reconcile
net income (loss) to net cash
provided (used) by operating
activities:
Depreciation and amortization 597,097 259,128
Non-cash compensation
associated with ESOP 184,602 184,602
----------- -----------
1,092,187 (182,832)
Changes in assets and
liabilities:
Decrease in accounts receivable 1,878,387 618,019
Increase in inventories (580,266) (1,876,890)
Decrease in prepaids and
refundable income taxes --- 45,396
Decrease (increase) in other
current assets 85,997 (371,101)
Increase in goodwill (44,511) (1,187,655)
Increase (decrease) in accrued
and deferred income taxes 22,156 (236,360)
Decrease (increase) in other assets (5,247) (577,571)
Increase (decrease) in accounts
payable and accrued liabilities (72,744) 471,787
----------- -----------
1,283,772 (3,114,375)
Net cash provided (used) by
operating activities 2,375,959 (3,297,207)
Investing Activities:
Additions to equipment and
leasehold improvements (439,552) (1,455,082)
----------- -----------
Net cash used by investing
activities (439,552) (1,455,082)
Financing Activities:
Proceeds from exercise of stock
options 85,723 9,500
Payment of debt (522,103) (184,602)
Increase in debt due to Datotek
acquisition 2,212,500
----------- -----------
Net cash used by financing
activities (436,380) 2,037,398
Net increase (decrease) in cash
and cash equivalents 1,500,027 (2,714,891)
Cash and cash equivalents at
beginning of year 3,877,790 6,460,887
----------- -----------
Cash and cash equivalents at the
end of the third quarter $ 5,377,817 $ 3,745,996
=========== ===========
Supplemental disclosures:
Interest paid $ 188,126 $ 86,394
Income taxes paid (net of
refunds received 41,497 (9,710)
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 6
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STATEMENT OF FAIR PRESENTATION
Interim Financial Statements. The accompanying unaudited financial statements
include all adjustments (consisting only of normal recurring accruals) which
are, in the opinion of management, necessary for fair presentation of the
results of operations for the periods presented. Interim results are not
necessarily indicative of the results to be expected for a full year.
Certain information on footnote disclosures normally included in financial
statements prepared in accordance with general accepted accounting principals
has been condensed or omitted as allowed by Form 10-Q. The accompanying
unaudited consolidated financial statements should be read in conjunction with
Company's consolidated financial statements for the year ending September 30,
1995 as filed with the Securities and Exchange Commission on Form 10-K.
NOTE 1. Earnings Per Share
For the quarters and nine months ended June 29, 1996 and July 1, 1995, 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>
June 29, 1996 September 30, 1995
<S> <C> <C>
Raw Materials $ 2,305,457 $ 1,386,393
Work in Process 558,365 667,388
Finished Goods 144,272 374,047
----------- -----------
$ 3,008,094 $ 2,427,828
----------- -----------
</TABLE>
NOTE 3. Long-Term Debt
As of June 29, 1996, the Company had a $2,500,000 line of credit at the rate of
prime plus 1/2 of 1%. This line of credit is secured by a pledge of
substantially all the assets of the Company and is due to mature on April 30,
1997. Availability under the line of credit had been reduced by $87,593 for
outstanding standby letters of credit (as of June 29, 1996). Other than these
standby letters of credit, the Company had no borrowings under the line of
credit at June 29, 1996.
On November 17, 1989, the Company established the Technical Communications
Corporation Employees' Stock Ownership Trust (the Trust) for the benefit of its
employees. 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.
<PAGE> 7
Notes to Condensed Consolidated Financial Statements (continued)
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) 8.75% 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 $490,000 in August 1997. Except
for the possibility of refinancing this balloon payment, 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
employees, the principal portion of these payments is recorded as compensation
expense.
On May 31, 1995, the Company completed an asset purchase of the secure
communications business of Datotek, Inc. 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%.
NOTE 4. 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> 8
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 long-term contracts on a unit-of-
delivery basis, 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 June 29, 1996 was $4,359,200
representing an increase of 52% from $2,868,787 as of September 30, 1995. The
Company expects to deliver the majority of this backlog in the current fiscal
year.
Net sales for the quarter ended June 29, 1996 and July 1, 1995, were $3,889,148
and $2,900,841, respectively. For the nine months ended June 29, 1996 and July
1, 1995 net sales were $9,725,715 and $4,824,406. The 25% increase in the
third quarter and 102% in nine month net sales was primarily due to the
acquisition of the principal business of Datotek, Inc. in May 1995. The
Company anticipates that the pattern of uneven quarterly revenue generation
will continue.
Gross profit for the third quarter of fiscal year 1996 was $2,248,854, as
compared to gross profit of $1,865,881 in the third quarter of fiscal year
1995. Gross profit for the first nine months of fiscal year 1996 was
$5,415,750, as compared to gross profit of $2,451,831 for the first nine months
of fiscal year 1995. This represented a 21% increase in gross profit in the
third quarter, and a 121% increase in gross profit for the first nine months of
the fiscal year. Gross profit expressed as a percentage of sales was 58% in
the third quarter and 56% for the first nine months of fiscal year 1996, as
compared to 64% in the third quarter and 51% for the first nine months of
fiscal year 1995. Since a considerable portion of manufacturing costs is
relatively fixed, increases in net sales usually result in increases in margin
percentage. The third quarter of fiscal 1995, however, had higher margins than
the third quarter of fiscal 1996 due to the mix of products sold and lower
operating expenses.
Operating expenses for the third quarter and first nine months of fiscal 1996
were $1,934,141 and $5,065,441, respectively. The operating expenses in the
third quarter and first nine months of fiscal 1995 were $1,326,840 and
$3,347,912, respectively. This increase of 46% in the third quarter and 51% in
the first nine months was primarily due to higher commissions and business and
product development expenses, plus additional depreciation and amortization as
a result of the acquisition of the assets of Datotek, Inc. in May 1995.
After-tax income for the third quarter and first nine months of fiscal year
1996 was $284,637 or $.23 per share and $310,488 or $.25 per share,
respectively. The after-tax income in the third quarter and after-tax loss for
the first nine months of fiscal year 1995 were $361,336 or $.29 per share and
($626,562) or ($.50) per share, respectively. Earnings in the third quarter of
last fiscal year were higher due to lower operating expenses and the high gross
margin mentioned above. Earnings for the current nine-month period were higher
than those of the same period a year ago because of higher sales and gross
margins in the current nine-month period.
Liquidity and Capital Resources
Cash and short-term investments increased by $1,500,027 or 39% to $5,377,817 as
of June 29, 1996, from a balance of $3,877,790 at September 30, 1995. This
increase was primarily as a result of accounts receivable collections. The
current ratio improved to 3.9:1 at June 29, 1996, compared to 3.9:1 as of
September 30, 1995. Inventories were $3,008,094 as of June 29, 1996,
representing a 24% increase from the September 30, 1995 balance of $2,427,828
due to inventory buildup for future shipments.
<PAGE> 9
Management's Discussion and Analysis (continued)
Information on the Company's long-term debt is to be found on page 4, Note 3,
"Long-Term Debt" of this Form 10-Q.
Management currently anticipates no unusual capital expenditures and no
increases in the Company's requirements for capital above its present resources
for fiscal year 1996.
This Form 10-Q contains 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. The Company's actual results
could differ materially from those set forth in the forward-looking statements.
Certain factors that could affect capital expenditures, the Company's
requirements for capital and the Company's quarterly financial performance
include general economic conditions, the ability of the Company to obtain
orders for its products and to ship such orders, timely collection of accounts
receivable, technological changes in the area of secure communications, U.S.
and foreign governmental policies affecting the sale of secure communications
equipment, the ability of the Company to refinance its ESOP-related debt in
August 1997, etc.
<PAGE> 10
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:
Not applicable.
Item 3. Defaults Upon Senior Securities:
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders:
The Annual Meeting of Stockholders of the Company was held on
February 12, 1996. Set forth below is a description of each
matter voted upon at the meeting as well as the number of votes
cast for or against each such matter.
<TABLE>
<CAPTION>
Broker
Description For Against Abstentions Non-Votes
<S>
To fix the number of <C> <C> <C> <C>
directors at six 1,163,124 14,447 4,599 ---
Election of Directors:
Arnold M. McCalmont 1,172,599 4,146 5,425 ---
Lawrence A. Kletter 1,172,599 4,146 5,425 ---
Herbert A. Lerner 1,176,745 0 5,425 ---
James A. McCalmont 1,172,599 4,146 5,425 ---
Philip A. Phalon 1,170,199 6,546 5,425 ---
Victor Sabella 1,174,345 2,400 5,425 ---
To ratify the selection of
the firm of Arthur Andersen LLP
as the Company's auditors 1,166,527 4,212 4,206 7,225
To adopt the 1995 Employee
Stock Purchase Plan 542,020 38,080 85,618 516,452
</TABLE>
Item 5. Exhibit 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.
b. Reports on Form 8-K: none.
<PAGE> 11
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)
Date: August 5, 1996 By: /s/ Roland S. Gerard
ROLAND S. GERARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
Date: August 5, 1996 By: /s/ Graham R. Briggs
GRAHAM R. BRIGGS, VICE PRESIDENT
AND CHIEF ACCOUNTING OFFICER
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheets at June 29, 1996 (Unaudited) and the
Condensed Consolidated Statements of Operations and Cash Flows for the Nine
Months Ended June 29, 1996 (Unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-END> JUN-29-1996
<CASH> 5,377,817
<SECURITIES> 0
<RECEIVABLES> 3,133,579
<ALLOWANCES> 53,707
<INVENTORY> 3,008,094
<CURRENT-ASSETS> 11,813,051
<PP&E> 4,065,916
<DEPRECIATION> 2,414,602
<TOTAL-ASSETS> 15,253,415
<CURRENT-LIABILITIES> 3,035,826
<BONDS> 0
<COMMON> 126,450
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 15,253,415
<SALES> 3,889,148
<TOTAL-REVENUES> 3,889,148
<CGS> 1,640,294
<TOTAL-COSTS> 1,640,294
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (58,530)
<INCOME-PRETAX> 330,277
<INCOME-TAX> 45,640
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 284,637
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
