<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
September 28, 1996 0-8588
__________________ ______
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_______________TO_______________.
Technical Communications Corporation
____________________________________
(Exact name of registrant as specified in its charter)
Massachusetts 04-2295040
_____________________________________________ ___________________
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
100 Domino Drive, Concord, MA 01742-2892
_____________________________________________ ___________________
(Address of principal executive offices) (Zip code)
Registrant's telephone number,
including area code (508) 287-5100
Securities registered pursuant to Section 12 (b) of the Act:
None None
_____________________________________________ ______________________
(Title of each class) (Name of each exchange
on which registered)
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.10 Par Value
____________________________
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
[X]
Based on the closing price of the stock as of December 5, 1996, the
aggregate market value of the registrant's Common Stock, par value $ .10
per share, held by non-affiliates of the registrant as of December 5, 1996,
was approximately $11,700,000.
The number of shares of the registrant's Common Stock, par value $ .10
per share, outstanding as of December 12, 1996, was 1,264,496.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
___________________________________
The registrant's proxy statement, which will be filed with the Securities
and Exchange Commission not later than December 31, 1996, is incorporated
herein by reference.
FORWARD-LOOKING STATEMENTS
THIS FORM 10-K 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 MIGHT CAUSE SUCH A DIFFERENCE ARE
DISCUSSED IN THE SECTION ENTITLED "CERTAIN FACTORS AFFECTING FUTURE
OPERATING RESULTS" ON PAGE 7 OF THIS FORM 10-K.
PART I
Item 1. BUSINESS
(a) General
_______
Technical Communications Corporation (the "Company") was organized in
1961 as a Massachusetts corporation to engage primarily in consulting
activities. However, since the late 1960s its business has consisted
entirely of the design, development, manufacture, distribution, and sale of
communications security devices and systems.
(b) Information as to Industry Segments
___________________________________
The Company's business consists of only one industry segment, which is
the design, development, manufacture, distribution, and sale of
communications security devices and systems.
(c) Description of Business
_______________________
The Company's products consist of sophisticated electronic devices
which enable users to transmit information in a scrambled format and permit
receivers to reconstitute the information in an unscrambled format. The
Company's products can be used to protect confidentiality in communications
between radios, telephones, facsimile machines and data processing
equipment over wires, fiber optic cables, radio waves and microwave and
satellite links. A customer may order and receive equipment which is
specially programmed to scramble transmissions in accordance with a code to
which only the customer has access. The principal markets for the
Company's products are foreign and domestic governmental agencies, law
enforcement agencies, and multinational companies.
The Company has several competitors, including foreign-based
companies, in the communications security devices field. Many of these
competitors are companies which may have greater financial and other
resources than the Company. The Company competes based on its service, the
operational and technical features of its products, its sales expertise and
pricing. The Company sells directly to customers, original equipment
manufacturers, and value-added resellers using its in-house sales force as
well as domestic and international representatives and distributors.
In fiscal 1996, the Company had three customers, including the U.S.
Government as one customer, representing 54% (26%, 16%, and 12%) of net
sales. In fiscal 1995, the Company had three customers, including the U.S.
Government as one customer, representing 57% (24%, 20%, and 13%) of net
sales. In fiscal 1994, the Company had three customers, including the U.S.
Government as one customer, representing 52% (28%, 15% and 9%) of net
sales.
The Company's backlog of firm orders as of September 28, 1996 was
$4,756,845, compared to $2,868,787 as of September 30, 1995. The Company
expects to deliver substantially all of its backlog in the current fiscal
year.
The Company subcontracts a large portion of its manufacturing
operations. Many of the components used in the Company's products are
standard components available from more than one supplier. The Company
has, or believes that it could develop without significant delay,
alternative sources for almost all materials and components used in the
manufacture of its products. The Company's internal manufacturing process
consists primarily of adding critical components, final assembly, quality
control, testing and burn-in. Delivery time varies depending on the
products and options ordered.
Page 2 of 12
<PAGE>
The Company's technological expertise and experience, including
certain proprietary rights which it has developed and maintains as trade
secrets, are crucial to the conduct of the Company's business. Management
is of the opinion that, while patent protection is desirable with respect
to certain of its products, none of the Company's patents are material to
the conduct of its business. Eight patents have been issued to the
Company. The Company has a number of trademarks for various products,
including TCC, KEYNET and CIPHER X. The Company does not deem any of its
trademarks to be material to the conduct of its business.
Research and development is undertaken by the Company on both its own
initiative and specific customer request. In order to develop the
technology needed to compete successfully, the Company must attract and
retain qualified personnel, improve existing products and develop new
products. During the twelve-month periods ended September 28, 1996,
September 30, 1995, and October 1, 1994, the Company spent $1,955,852,
$1,492,370, and $1,221,713, respectively, on product development costs.
As of September 28, 1996, the Company employed approximately 64
persons. The Company believes that its relationship with its employees is
good.
(d) Foreign Operations
__________________
The Company is dependent upon its foreign sales. Foreign sales were
more profitable than domestic sales during the fiscal year ended October 1,
1994, because the mix of products sold abroad included more products with
higher profit margins than the mix of products sold domestically. This
trend continued in fiscal year 1995, but in fiscal year 1996, foreign and
domestic sales were equally profitable. The Company does not believe that
this change necessarily indicates a trend. Sales to foreign markets have
been and will continue to be affected by the stability of foreign
governments, economic conditions, export and other governmental
regulations, and changes in technology. The Company attempts to minimize
the financial risks normally associated with foreign sales by utilizing
letters of credit confirmed by U.S. banks and by using foreign credit
insurance. With one exception, foreign sales have been in U.S. dollars.
The sale in foreign currency was hedged against fluctuations in exchange
rates to minimize financial risk.
Most of the Company's export sales are conducted through its wholly-
owned subsidiary, TCC Foreign Sales Corporation, which is qualified as a
Foreign Sales Corporation (FSC) under the Internal Revenue Code.
Export licenses are required from the federal government for the
export of the Company's products to foreign countries.
Information regarding the Company's revenue from export sales for the
past five years is set forth in Item 6, "SELECTED FINANCIAL DATA" (Page 5).
Item 2. PROPERTIES
The Company leases its headquarters and a branch sales office under
operating leases.
On October 16, 1992, the Company signed its current lease on its
headquarters. The future minimum lease payments are $146,160 per year for
calendar years 1995 through 1997. The lease expires on December 31, 1997,
but can be renewed for one or two additional two and one-half year terms
ending June 30, 2000, and December 31, 2002. The Company also retains an
option to purchase the building at fair market value but not to exceed
$2,262,000, exercisable at each two and one-half year interval during the
initial term of the lease or any renewals thereof.
Management believes the current facility is capable of meeting the
Company's anticipated needs for the foreseeable future.
Item 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
Page 3 of 12
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PART II
Item 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock, $.10 par value, is traded on the over-
the-counter market, on the NASDAQ National Market System, under the symbol
"TCCO". The following table presents low and high bid information for the
time periods specified. The over-the-counter market quotations reflect
inter-dealer prices, without retail markup, markdown or commission and may
not necessarily represent actual transactions. The over-the-counter market
quotations have been furnished by The NASDAQ Stock Market, Inc.
<TABLE>
<CAPTION>
Price
________________
Title of Quarter
Class Ending Low High
____________ _________ ______ ______
<S> <C> <C> <C>
Common Stock,
$.10 par value
12/31/94 $ 7.00 $ 9.25
04/01/95 6.75 8.50
07/01/95 6.25 8.25
09/30/95 6.25 11.00
12/30/95 7.25 10.25
03/30/96 6.75 9.00
06/29/96 7.50 32.00
09/28/96 8.75 18.00
</TABLE>
The Company has paid no cash dividends in the past and has no plans to
pay cash dividends in the foreseeable future.
As of December 5, 1996, there were approximately 1,300 record holders
of Common Stock, $.10 par value. As of December 5, 1996, the low and high
prices of the Common Stock were $9.125 and $9.625.
Page 4 of 12
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Item 6. SELECTED FINANCIAL DATA
Selected Financial Data:
<TABLE>
<CAPTION>
Fiscal Years ended:
September 28, September 30, October 1, October 2, September 26,
1996 1995 1994 1993 1992
_____________ _____________ ____________ ___________ _____________
<S> <C> <C> <C> <C> <C>
Net Sales:
Domestic $ 3,633,425 $ 1,535,015 $ 707,735 $ 3,043,963 $ 3,010,859
Foreign 10,379,377 8,692,550 8,357,980 6,679,220 11,515,348
_____________________________________________________________________________________
Total net
sales 14,012,802 (B) 10,227,565 (B) 9,065,715 9,723,183 14,526,207
Gross profit 8,231,388 5,351,882 5,294,825 5,056,996 9,073,433
Net income 532,147 88,745 116,046 83,440 1,258,057
Net income
per share
of common
stock
(Note A) $ .42 $ .07 $ .09 $ .07 $ 1.02
Weighted
average
shares out-
standing 1,257,384 1,252,567 1,245,410 1,238,211 1,236,362
</TABLE>
<TABLE>
<CAPTION>
As of:
September 28, September 30, October 1, October 2, September 26,
1996 1995 1994 1993 1992
_____________ _____________ ____________ ____________ _____________
<S> <C> <C> <C> <C> <C>
Assets $ 16,000,033 $ 15,348,435 $ 12,088,955 $ 12,019,465 $ 13,443,913
Long-term
obligations $ 1,200,000 $ 2,550,612 $ 1,132,748 $ 550,386 $ 1,638,589
________________________________________________________________________________________
</TABLE>
Notes to Selected Financial Data
(A) For fiscal years 1996, 1995, 1994, 1993, and 1992 the dilutive effect
of shares assumed to have been issued on exercise of stock options was
not material. The Company has not paid a cash dividend in the
past five years.
(B) Amounts include the sales since May 31, 1995 of Datotek, Inc. The
Company acquired the assets comprising the secure communications
business of Datotek, Inc. on May 31, 1995. See footnote 15 of
the Notes to Consolidated Financial Statements on Page AR 17.
_______________________________________________________________________________
Selected Quarterly Financial Data:
For the years ended September 28, 1996, and September 30, 1995.
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
Fiscal 1996 December 30, 1995 March 30, 1996 June 29, 1996 September 28, 1996
___________ _________________ ______________ _____________ __________________
<S> <C> <C> <C> <C>
Net sales $ 2,140,840 $ 3,695,727 $ 3,889,148 $ 4,287,087
Gross profit 1,150,926 2,015,971 2,248,854 2,815,637
Net income
(loss) 288,214) 314,065 284,637 221,659
Net income
(loss) per
share $ (.23) $ .25 $ .23 $ .17
</TABLE>
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
Fiscal 1995 December 31, 1994 April 1, 1995 July 1, 1995 September 30, 1995
___________ _________________ ______________ _____________ __________________
<S> <C> <C> <C> <C>
Net sales $ 1,134,076 $ 789,489 $ 2,900,841 $ 5,403,159
Gross profit 490,144 95,806 1,865,881 2,900,051
Net income
(loss) (357,904) (629,994) 361,336 715,307
Net income
(loss) per
share $ (.29) $ (.50) $ .29 $ .57
</TABLE>
Page 5 of 12
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain Factors Affecting Future Operating Results
__________________________________________________
This Form 10-K 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 might cause such a difference include but
are not limited to the following: future changes in export laws or
regulations, changes in technology, the effect of foreign political unrest,
the ability to hire, retain and motivate technical, management and sales
personnel, the risks associated with the technical feasibility and market
acceptance of new products, changes in telecommunications protocols, the
effects of changing costs, exchange rates and interest rates, the Company's
ability to renegotiate and extend its ESOP loans and its line of credit
with its banks, the correctness of management judgment that certain current
expenditures will benefit the Company in the future, and the accuracy of
management's estimates of the value of the Company's assets and of the
adequacy of its reserves.
Liquidity and Capital Resources
_______________________________
Cash and cash equivalents increased from $3,877,790 at September 30,
1995 to $6,381,026 at September 28, 1996. This increase was primarily due
to a decrease in accounts receivable. The current ratio of the Company, an
indication of its working capital strength, decreased from 3.8 to 1 as of
September 30, 1995 to 2.9 to 1 as of September 28, 1996. The decrease was
primarily caused by the full balance of the ESOP loans becoming current.
During the 1995 fiscal year, the Company and its bank renewed its
existing Revolving Line of Credit Agreement. The $2,500,000 line of credit
is available until May 1, 1997. Borrowings under the line of credit bear
interest at the bank's prime rate plus one-half percent per annum. The
line of credit is secured by a lien on substantially all of the Company's
assets and will be used for working capital requirements and to support
letters of credit. While there have been no borrowings under the line of
credit, availability under the line as of September 28, 1996, has been
reduced by $66,910 for outstanding letters of credit.
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 from two banks, respectively, 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
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 8.75%. It requires a balloon payment of
approximately $82,000 in April 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. Subject to the approval of the two banks, the Company anticipates
refinancing both loans to eliminate or postpone beyond fiscal 1997 the two
balloon payments.
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
$3,687,000 (see footnote 15 of the Notes to Consolidated Financial
Statements on Page AR 17.). This acquisition was funded partly by the
Company's cash reserves 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%. However, as of November 8, 1996, the
Company paid off both loans in full.
Management anticipates no unusual capital expenditures and no
anticipated increases in the Company's requirements for capital resources
for fiscal 1996. Management believes that existing working capital will be
sufficient to meet contemplated operating and capital requirements in the
foreseeable future.
Page 6 of 12
<PAGE>
Results of Operations
_____________________
1996 COMPARED TO 1995
_____________________
Consolidated net sales for the year ended September 28, 1996 were
$14,012,802 compared with sales of $10,227,565 for the prior fiscal year.
This increase of $3,785,237, or 37%, is attributed to the acquisition of
substantially all the assets comprising the secure communications business
of Datotek, Inc. from AT&T on May 31, 1995.
Domestic sales for fiscal 1996 amounted to $3,633,425, compared with
$1,535,015 for the previous fiscal year. The increase of 137% was due to
increased procurement from U.S. government agencies. Foreign sales
increased to $10,379,377 in fiscal 1996, from $8,692,550 in fiscal 1995, an
increase of 19%.
Gross profit for the fiscal year 1996 was $8,231,388, compared to
gross profit of $5,351,882 in fiscal year 1995. The 54% increase in gross
profit is primarily due to increased sales. Gross profit expressed as a
percentage of sales was 59% in fiscal 1996, compared to 52% in fiscal year
1995. Gross profit as a percentage of sales increased primarily due to the
resale of Datotek inventories that had been purchased at a discount. A
portion of these savings are expected to be non-recurring.
Engineering, design and product development costs in fiscal year 1996
were $1,955,852, compared to $1,492,370 in fiscal 1995. In fiscal 1996 a
higher proportion of development costs were for TCC's own products,
resulting in a lesser proportion of such cost being billed directly to
customers.
Selling, general and administrative expenses of $5,582,553 in fiscal
year 1996 increased by $1,755,775, or 46% greater than such expenses in
fiscal year 1995. This increase was accounted for primarily by increases
in selling and business development expenses. Management believes that
these increased expenditures are a necessary investment in the Company's
future.
Investment income earned during fiscal year 1996 was $239,142,
compared to $271,815 in fiscal year 1995. The decrease of $32,673 is due
to lower average cash balances (the Datotek acquisition of May 31, 1995 was
paid for partially from the Company's cash). Interest expense of $243,472
in fiscal year 1996 represented an increase of $84,902 from the fiscal 1995
level. This was due to a full year of interest expense on the $2,250,000
loan incurred in connection with the Datotek acquisition of May 31, 1995.
(The loans incurred in connection with the Datotek acquisition were paid
off as of November 8, 1996.)
The Company had net earnings of $532,147 or $.42 per share in fiscal
year 1996, compared to net earnings of $88,745 or $.07 per share in fiscal
year 1995. This represents an increase in net earnings of approximately
500%. This increase was the result of the $3,785,237 increase in sales
coupled with the improved gross profit percentage.
The effects of inflation and changing costs have not had a significant
impact on sales or earnings in recent years. As of December 1, 1996, less
than one percent (1%) of the Company's monetary assets or liabilities were
subject to foreign exchange risks. The Company hedges foreign currency
transactions against price changes to minimize financial risk. The Company
attempts to minimize the financial risks normally associated with foreign
sales by utilizing letters of credit confirmed by U.S. banks in most cases
and using exporters insurance. The Company usually includes an inflation
factor into pricing when negotiating multi-year contracts with customers.
1995 COMPARED TO 1994
_____________________
Consolidated net sales for the year ended September 30, 1995, were
$10,227,565, compared with sales of $9,065,715 for the prior fiscal year.
This increase of $1,161,850 was attributed to increases in domestic sales
(71%) and foreign sales (29% ) from the previous year.
Domestic sales for fiscal 1995 amounted to $1,535,015, compared with
$707,735 for the previous fiscal year. The increase was due to increased
procurement from U.S. government agencies. Foreign sales increased to
$8,692,550 in fiscal 1995, from a level of $8,357,980 in fiscal 1994. A
significant portion of this increase resulted from sales of the Company's
DSD72A-SP bulk encryption equipment to protect missile control telemetry.
Gross profit for the fiscal year 1995 was $5,351,882, compared to
gross profit of $5,294,825 in fiscal year 1994. Gross profit increased
slightly due to increased sales. Gross profit expressed as a percentage of
sales was 52% in fiscal 1995, compared to 58% in fiscal year 1994. The
gross profit as a percentage of sales was reduced primarily as a result of
increased warranty and inventory obsolescence costs resulting from the
Datotek acquisition. A portion of these costs is expected to be non-
recurring.
Page 7 of 12
<PAGE>
Engineering, design and product development costs in fiscal year 1995
were $1,492,370, compared to $1,221,713 in fiscal 1994. In fiscal 1995 a
higher proportion of development costs was for TCC's own products,
resulting in a lesser proportion of such costs being billed directly to
customers.
Selling, general and administrative expenses of $3,826,778 in fiscal
year 1995 decreased by $218,398, or 5% less than such expenses in fiscal
year 1994. This decrease was accounted for primarily by decreases in
administration and engineering expenses. These decreases were primarily
the result of lower salary costs and reduction in material usage in the
engineering department. The reduction in material usage in the engineering
department resulted from working on engineering development jobs that were
more software related.
Investment income earned during fiscal year 1995 was $271,815,
compared to $212,211 in fiscal year 1994. The increase of $59,604 is
primarily due to higher interest rates on our investments. Interest
expense of $158,570 in fiscal year 1995 represented an increase of $44,455
from the fiscal 1994 level. This was due to the addition of a $2,250,000
loan incurred in connection with the Datotek acquisition.
The Company had net earnings of $88,745 or $.07 per share in fiscal
year 1995, compared to net earnings of $116,046 or $.09 per share in fiscal
year 1994. This represents a decrease in net earnings of approximately
24%. This decrease was the direct result of additional costs incurred in
connection with the Datotek acquisition.
The Datotek acquisition has increased the Company's market share of
the secure communications business in which Datotek competed and will
create more visibility in the world market. Datotek's customer database
and contacts will be a valuable asset to the Company's long-range sales
objectives. The Company's distribution agreement with AT&T Corp. to sell
certain secure communications equipment will also positively affect sales.
1994 COMPARED TO 1993
_____________________
Consolidated net sales for the year ended October 1, 1994, were
$9,065,715, compared with sales of $9,723,183 for the prior fiscal year.
This decrease of $657,468 was caused by a reduction in domestic sales from
the previous year.
Because of the long lead-times associated with the acquisition of
orders, new products rarely contribute significantly to sales in the year
in which they are introduced.
Domestic sales for fiscal 1994 amounted to $707,735, compared with
$3,043,963 for the previous fiscal year. Two reasons contributed to this
reduction. The first was the General Services Administration's delay in
deploying already acquired TCC equipment on its FTS 2000 network. The
second reason stemmed from continuing uncertainty among our domestic
customers with regard to the "Clipper Chip" encryption algorithm. Foreign
sales increased 25% to $8,357,980 in fiscal 1994, from a level of
$6,679,220 in fiscal 1993. A significant portion of this increase resulted
from adopting the Company's existing DSD72A-SP bulk encryption equipment to
protect missile control telemetry.
Gross profit for the fiscal year 1994 was $5,294,825, compared to
gross profit of $5,056,996 in fiscal year 1993. Gross profit increased
despite the decrease in sales. Gross profit expressed as a percentage of
sales was 58% in fiscal 1994, compared to 52% in fiscal year 1993. The
gross profit improved primarily as a result of a higher proportion of
foreign sales, as compared to domestic, in the product mix. As a rule, the
gross margins on foreign sales tend to be higher than those on domestic
sales.
Engineering, design and product development costs in fiscal year 1994
were $1,221,713, compared to $1,856,785 in fiscal 1993. This apparent drop
in product development expenditures is primarily the result of the
Company's ability to charge more of its development effort to its customers
than in the previous year. Total engineering, design and development
expenses in fiscal 1994 were $1,793,161, compared to $2,084,970 in fiscal
1993. However, in fiscal 1994, the Company transferred $571,448 of
development expenses to inventory or cost of sales, compared to $228,185 in
the previous fiscal year. The remaining $291,809 decrease in total
engineering costs from fiscal 1993 to fiscal 1994 resulted entirely from
reductions in outside consulting costs, project material expenses and
facilities allocation.
Selling, general and administrative expenses of $4,045,176 in fiscal
year 1994 exceeded those of fiscal year 1993 by $863,434, or 27%. This
increase was accounted for by increases in sales, marketing and customer
service expenses. Management believes these increases are necessary in
order to assure a secure and profitable future for the Company.
Page 8 of 12
<PAGE>
Investment income earned during fiscal year 1994 was $212,211, almost
exactly equal to $211,168 in fiscal year 1993. Interest expense of
$114,115 in fiscal year 1994 represented a decrease of $36,382 from the
fiscal 1993 level. This was due to a lower outstanding average balance on
the ESOP loan (see Note 5 on page AR10).
The Company had net earnings of $116,046 or $.09 per share in fiscal
year 1994, compared to net earnings of $83,440 or $.07 per share in fiscal
year 1993. This represents an increase in net earnings of approximately
39%. This increase was the direct result of the increased gross margin,
partially offset by higher operating expenses referred to above.
Equipment and leasehold improvements as of October 1, 1994 increased
by $185,284 (gross) but declined by $106,706 (net), to $2,256,684 and
$707,133 respectively, compared to the equivalent figures for the end of
the previous fiscal year. The net declined because the amount of
depreciation taken during fiscal year 1994 exceeded the cost of new
equipment and leasehold improvements added during the fiscal year.
Accounts payable were $223,638 as of October 1, 1994, compared to
$416,235 as of October 2, 1993. The decrease was due to differences in the
timing of receipt of materials between the two year-ends. The current
portion of long-term debt of $246,136 as of October 1, 1994, decreased
compared to the October 2, 1993, balance of $1,088,203 because the Company
refinanced a portion of its ESOP loan in August 1994. Accrued compensation
and related expenses as of October 1, 1994, were $307,388 at the end of
fiscal year 1994 compared to $382,862 at the end of the previous year. The
decrease resulted from lower commissions payable at year-end, due to lower
sales during September 1994 as compared to sales during September 1993.
Other accrued liabilities increased from $701,760 at October 2, 1993, to
$859,675 as of October 1, 1994, primarily because of increased sales
commissions payable to distributors. Commission amounts due to
distributors are accrued at the time the sale is made, but are generally
not payable until payment is received by the Company.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index to the Financial Statements and Schedules on Page 10
hereof.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Items 10, 11 and 12 are incorporated by reference from the proxy
statement for the Annual Meeting of Shareholders to be held on February 10,
1997, which will be filed with the Commission not later than December 31,
1996.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 1995 the Company purchased a minority interest in
Net2Net Corporation, purchased certain products, and entered into a
distribution agreement with Net2Net Corporation. The President of Net2Net
is related to Arnold M. McCalmont, the Chairman of the Board of Directors
of the Company, and to James McCalmont, one of the Company's directors.
Arnold and James McCalmont, as well as Herbert Lerner, are also investors
in Net2Net Corporation.
Lawrence A. Kletter, Esq., a Director of the Company, is a member of a
law firm which provides legal services to the Company.
During 1996, 1995, and 1994, the Company leased a sales office from a
related party; lease payments were $1.00 in each year. The fair market
value of such rent is estimated to be below $5,000 per year.
Lawrence A. Kletter, a Director of the Company and a partner in the
law firm of Eckert Seamans Cherin & Mellott (securities law counsel for the
Company) and James A. McCalmont, a Director and employee of the Company,
are Trustees of the Trust.
Page 9 of 12
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
__________________________________
The financial statements and schedules listed in the accompanying index to
Financial Statements and Schedules are filed as part of this Annual Report
on Consolidated Form 10-K.
Index to Financial Statements and Schedules
___________________________________________
Page No. in
Annual Report
("AR") or
(a)1 Financial Statements Form 10-K
____________________ _________
Consolidated Balance Sheets: AR 6
September 28, 1996 and
September 30, 1995
Consolidated Statements of Income: AR 7
Years Ended September 28, 1996,
September 30, 1995 and October 1, 1994
Consolidated Statements of Cash Flows: AR 8
Years Ended September 28, 1996,
September 30, 1995 and October 1, 1994
Consolidated Statements of Stockholders' Equity: AR 9
Years Ended September 28, 1996,
September 30, 1995 and October 1, 1994
Notes to Consolidated Financial Statements AR 10
Report of Independent Public Accountants AR 19
(a)2 Financial Statement Schedules
_____________________________
Report of Independent Public Accountants on Supplemental
Schedules to the Consolidated Financial Statements and
Schedule II- Valuation and Qualifying Accounts 12
(a)3 List of Exhibits
________________
3.3(a) Articles of Organization of the Company
3.3(b) By-laws of the Company
3.22 List of Subsidiaries of the Company
(b) Reports on Form 8-K
___________________
None.
(c) Exhibits
________
All exhibits required by this Item 14 (c) were previously filed
with the Commission.
Page 10 of 12
<PAGE>
SIGNATURES
__________
Pursuant to the requirements of 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.
TECHNICAL COMMUNICATIONS CORPORATION
By: /s/ Roland S. Gerard
____________________
Roland S. Gerard
President and Chief Executive Officer
December 19, 1996
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.
/s/ Arnold M. McCalmont
_______________________
Arnold M. McCalmont
Chairman of the Board, Director
December 19, 1996
/s/ James A. McCalmont
______________________
James A. McCalmont
Director
December 19, 1996
/s/ Victor Sabella
__________________
Victor Sabella
Director
December 19, 1996
/s/ Philip A. Phalon
____________________
Philip A. Phalon
Director
December 19, 1996
/s/ Lawrence A. Kletter
_______________________
Lawrence A. Kletter
Director
December 19, 1996
/s/ Herbert A. Lerner
_____________________
Herbert A. Lerner
Treasurer, Director
December 19, 1996
/s/ Graham R. Briggs
____________________
Graham R. Briggs
Vice President - Finance and
Administration
December 19, 1996
Page 11 of 12
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
To Technical Communications Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in Technical Communications
Corporation's 1996 annual report to shareholders incorporated by reference
in the Form 10-K, and have issued our report thereon dated November 6,
1996. Our audit was made for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole. The supplemental
schedule to the consolidated financial statements listed as Item 14 (a) 2
in the Form 10-K is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This supplemental schedule has been subjected to the auditing
procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states, in all material respects,
the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.
Boston, Massachusetts
November 6, 1996
Technical Communications Corporation Schedule II
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Additions Deductions Balance at
Beginning Charged to from End
of year Expense Reserves of Year
__________ __________ __________ __________
<S> <C> <C> <C> <C>
Description
Allowance for doubtful accounts-
Year Ended September 28, 1996 $ 48,692 $ 10,000 $ 4,985 $ 53,707
Year Ended September 30, 1995 15,000 34,217 525 48,692
Year Ended October 1, 1994 15,000 -- -- 15,000
</TABLE>
Page 12 of 12
<PAGE>
EXHIBIT 13
Consolidated Balance Sheets:
September 28, 1996, and September 30, 1995.
<TABLE>
<CAPTION>
1996 1995
____________ ____________
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 6,381,026 $ 3,877,790
Accounts receivable - trade, less
allowance for doubtful accounts
of $53,707 in 1996 and $48,692
in 1995 3,219,124 5,011,966
Inventories (Note 4) 2,615,772 2,427,828
Refundable income taxes (Note 6) - 139,944
Other current assets 199,122 342,756
_________________________________________________________________________
Total current assets 12,415,044 11,800,284
_________________________________________________________________________
Equipment and leasehold improvements
(Note 16) 4,223,816 3,626,364
Less accumulated depreciation and
amortization 2,646,683 1,984,631
_________________________________________________________________________
Equipment and leasehold
improvements-net 1,577,133 1,641,733
_________________________________________________________________________
Goodwill 1,614,131 1,569,620
Less accumulated amortization 286,623 65,770
_________________________________________________________________________
Goodwill - net 1,327,508 1,503,850
_________________________________________________________________________
Deferred income taxes (Note 6) 221,640 -
Other assets 458,708 402,568
_________________________________________________________________________
$ 16,000,033 $ 15,348,435
_________________________________________________________________________
_________________________________________________________________________
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 504,860 $ 450,650
Long-term debt - current portion (Note 5) 1,145,175 696,136
Accrued liabilities:
Compensation and related expenses 597,938 429,146
Other (Note 3) 2,019,303 1,553,140
_________________________________________________________________________
Total current liabilities 4,267,276 3,129,072
_________________________________________________________________________
Long-term debt (Note 5) 1,200,000 2,345,175
Other long-term liabilities - 205,437
Commitments and contingencies (Notes 10,
12, 14 and 16)
Stockholders' Equity
Common stock - par value $.10 per share;
authorized 3,500,000 shares, issued
1,264,496 shares in 1996 and 1,254,426
in 1995 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 5) (695,175) (941,311)
Retained earnings 9,707,839 9,175,692
_________________________________________________________________________
Total stockholders' equity 10,532,757 9,668,751
_________________________________________________________________________
$16,000,033 $15,348,435
_________________________________________________________________________
_________________________________________________________________________
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page AR-6
<PAGE>
Consolidated Statements of Income:
Years Ended September 28, 1996, September 30, 1995, and October 1, 1994.
<TABLE>
<CAPTION>
1996 1995 1994
___________ ___________ __________
<S> <C> <C> <C>
Net sales $14,012,802 $10,227,565 $9,065,715
Cost of sales 5,781,414 4,875,683 3,770,890
_________________________________________________________________________
Gross profit 8,231,388 5,351,882 5,294,825
_________________________________________________________________________
Operating expenses:
Selling, general and
administrative expenses 5,582,553 3,826,778 4,045,176
Product development costs 1,955,852 1,492,370 1,221,713
_________________________________________________________________________
Total operating expenses 7,538,405 5,319,148 5,266,889
_________________________________________________________________________
Operating profit 692,983 32,734 27,936
Other income (expense):
Investment income 239,142 271,815 212,211
Interest expense (243,472) (158,570) (114,115)
Other 20,876 (27,652) 18,111
_________________________________________________________________________
Total other income 16,546 85,593 116,207
_________________________________________________________________________
Income before income taxes 709,529 118,327 144,143
Provision for income taxes
(Note 6) 177,382 29,582 28,097
Net income $ 532,147 $ 88,745 $ 116,046
_________________________________________________________________________
_________________________________________________________________________
Net income per common share
(Note 2) $ 0.42 $ 0.07 $ 0.09
Weighted average common shares
outstanding 1,257,384 1,252,567 1,245,410
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page AR-7
<PAGE>
Consolidated Statements of Cash Flows:
Years Ended September 28, 1996, September 30, 1995, and October 1, 1994.
<TABLE>
<CAPTION>
1996 1995 1994
_____________ _____________ ___________
<S> <C> <C> <C>
Operating Activities:
Net Income $ 532,147 $ 88,745 $ 116,046
Adjustments to reconcile
net income to net cash provided
(used) by operating activities:
Depreciation and amortization 882,905 500,850 291,990
Non-cash compensation
associated with ESOP 246,136 246,136 259,705
Changes in assets and liabilities,
net of the acquisition of Datotek:
Decrease (increase) in accounts
receivable 1,792,842 (992,005) 411,089
Decrease (increase) in inventories (187,944) 136,602 132,032
Decrease (increase) in refundable
income taxes 139,944 (55,604) 61,625
Decrease (increase) in other
current assets 143,634 (253,904) (28,886)
Decrease (increase) in other assets
and deferred income taxes (277,780) (256,216) (11)
Increase (decrease) in accounts payable
and other accrued liabilities 483,728 187,235 (110,156)
___________________________________________________________________________________________
Net cash provided (used) by operating
activities 3,755,612 (398,161) 1,133,434
___________________________________________________________________________________________
Investing Activities:
Additions to equipment and
leasehold improvements (597,452) (366,300) (185,284)
Cash paid for Datotek acquisition (44,511) (3,687,000) 0
___________________________________________________________________________________________
Net cash provided (used) by investing
activities (641,963) (4,053,300) (185,284)
___________________________________________________________________________________________
Financing Activities:
Proceeds from exercise of stock
options 85,723 14,500 63,600
Proceeds from bank loan - 2,250,000 -
Payment of debt (696,136) (396,136) (259,705)
___________________________________________________________________________________________
Net cash provided (used) by financing
activities (610,413) 1,868,364 (196,105)
___________________________________________________________________________________________
Net increase (decrease) in cash and
cash equivalents 2,503,236 (2,583,097) 752,045
Cash and cash equivalents at beginning
of year 3,877,790 6,460,887 5,708,842
___________________________________________________________________________________________
Cash and cash equivalents at end of year $ 6,381,026 $ 3,877,790 $ 6,460,887
___________________________________________________________________________________________
___________________________________________________________________________________________
Supplemental disclosures:
Interest paid $ 243,472 $ 158,570 $ 114,115
Income taxes paid
(net of refunds received) 103,497 (24,401) (36,626)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page AR-8
<PAGE>
Consolidated Statements of Stockholders' Equity:
Years Ended September 28, 1996, September 30, 1995, and October 1, 1994
<TABLE>
<CAPTION>
1996 1995 1994
____________ ____________ ____________
<S> <C> <C> <C>
Shares of Common Stock:
Beginning balance 1,254,426 1,251,176 1,238,276
Exercise of stock options 10,070 3,250 12,900
_____________________________________________________________________________
Ending balance 1,264,496 1,254,426 1,251,176
_____________________________________________________________________________
_____________________________________________________________________________
Common Stock at par value:
Beginning balance $ 125,443 $ 125,118 $ 123,828
Exercise of stock options 1,007 325 1,290
_____________________________________________________________________________
Ending balance 126,450 125,443 125,118
_____________________________________________________________________________
Treasury Stock:
Beginning balance (10,000 shares) (80,000) (80,000) (80,000)
Purchase of treasury stock - - -
_____________________________________________________________________________
Ending balance (80,000) (80,000) (80,000)
_____________________________________________________________________________
Additional Paid-In Capital
Beginning balance 1,388,927 1,374,752 1,312,442
Exercise of stock options 84,716 14,175 62,310
_____________________________________________________________________________
Ending balance 1,473,643 1,388,927 1,374,752
_____________________________________________________________________________
ESOP Deferred Compensation:
Beginning balance (941,311) (1,187,447) (1,447,152)
Principal payments on ESOP debt
(Note 5) 246,136 246,136 259,705
_____________________________________________________________________________
Ending balance (695,175) (941,311) (1,187,447)
_____________________________________________________________________________
Retained Earnings:
Beginning balance 9,175,692 9,086,947 8,970,901
Net income 532,147 88,745 116,046
_____________________________________________________________________________
Ending balance 9,707,839 9,175,692 9,086,947
_____________________________________________________________________________
Total stockholders' equity $10,532,757 $ 9,668,751 $ 9,319,370
_____________________________________________________________________________
_____________________________________________________________________________
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page AR-9
<PAGE>
Notes to Consolidated Financial Statements
(1) Company Operations
Technical Communications Corporation and its wholly-owned subsidiaries
(the Company) operate in one industry segment: the design, development,
manufacture, distribution and sale of communications security devices
and systems.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, TCC Foreign Sales
Corporation, a qualified Foreign Sales Corporation (FSC), and TCC
Investment Corporation, a Massachusetts Security Corporation. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits at banks, and
certificates of deposit and other investments (including mutual
funds) readily convertible into cash. Cash equivalents are stated at
cost, which approximates market value.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation
and amortization are computed using the straight-line method over the
estimated useful life of the asset. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts, and any resulting gain or loss is
recognized in income for the period. The cost of maintenance and
repairs is charged to income as incurred; significant renewals and
betterments are capitalized.
Recognition of Revenue
The Company generally recognizes revenue upon shipment. Income on
long-term contracts is recognized on the unit-of-delivery basis.
Unbilled costs on unit-of-delivery contracts are included in
inventory. There were no material accounts receivable related to
long-term contracts at September 28, 1996, or September 30, 1995.
Income Taxes
The Company adopted Statement of Financial Accounting Standard No.
109 "Accounting for Income Taxes" (SFAS 109) in fiscal year 1994.
SFAS 109 requires the use of the liability method in accounting for
income taxes. Under the liability method, deferred income taxes are
recognized at current income tax rates to reflect the tax effect of
temporary differences between the consolidated financial reporting
and tax bases of assets and liabilities.
Page AR-10
<PAGE>
Notes to Consolidated Financial Statements (continued)
Warranty Costs and Field Installation Costs
The Company provides for warranty costs based on a percentage of
sales. The percentage is adjusted periodically in accordance with
actual experience. As of September 28, 1996, the Company accrued an
additional $192,000 of warranty costs related to specific product
warranty obligations. Field installation costs, which are accrued
upon sale of product when appropriate, represent the Company's
obligation to provide installation of equipment already sold.
Earnings per Share
Earnings per common share are based on the weighted average number of
shares outstanding during the year using the treasury stock method.
The effect of assumed conversion of dilutive stock options is not
material.
Reclassification of Prior Year Amounts
Certain prior year financial statement information has been
reclassified to be consistent with the current year presentation.
Fiscal Year-End Policy
The Company by-laws call for its fiscal year to end on the Saturday
closest to the last day of September, unless otherwise decided by its
Board of Directors. Fiscal years 1996, 1995 and 1994 ended on
September 28, 1996, September 30, 1995 and October 1, 1994,
respectively.
(3) Other Accrued Liabilities
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
September 28, September 30,
1996 1995
_____________ _____________
<S> <C> <C>
Reserve for product warranty $ 386,175 $ 533,126
Reserve for product installation 141,650 162,000
Customer advance payments 108,402 121,554
Sales representative commissions 340,928 64,588
Customer support agreements 344,520 434,000
Income taxes payable 463,227 99,461
Other 234,401 138,411
________________________________________________________________________
Total $ 2,019,303 $ 1,553,140
________________________________________________________________________
________________________________________________________________________
</TABLE>
(4) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
September 28, September 30,
1996 1995
_____________ _____________
<S> <C> <C>
Finished goods $ 10,557 $ 374,047
Work in process on long-term contracts - 25,056
Other work in process 853,422 642,332
Raw materials and supplies 1,751,793 1,386,393
________________________________________________________________________
Total inventories $ 2,615,772 $ 2,427,828
________________________________________________________________________
________________________________________________________________________
</TABLE>
Page AR-11
<PAGE>
Notes to Consolidated Financial Statements (continued)
(5) Debt
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 guarantor on the outstanding loans and,
as a result, has recorded the principal balance of such loans on its
balance sheet as 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 8.75%. It requires a balloon payment of
approximately $82,000 in April 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.
Subject to the approval of the two banks in question, the Company
anticipates refinancing both loans to eliminate or postpone beyond
fiscal 1997 the two balloon payments. 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 contributions is
recorded as compensation expense. Such contributions are, therefore,
expensed to compensation and interest when they are made or accrued. The
compensation and interest elements were as follows:
<TABLE>
<CAPTION>
September 28, September 30, October 1,
1996 1995 1994
_____________ _____________ __________
<S> <C> <C> <C>
Compensation $ 246,136 $ 246,136 $ 259,705
Interest 71,996 88,305 114,115
_____________________________________________________________
Total contributions $ 318,132 $ 334,441 $ 373,820
_____________________________________________________________
_____________________________________________________________
</TABLE>
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 $3,687,000 (see Note 15). This acquisition was funded partly by the
Company's cash reserves 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%. However, as of
November 8, 1996, the Company paid off both loans in full.
At September 28, 1996, the Company had a $2,500,000 line of credit at a
rate of prime plus 1/2 of 1%. Availability under the line of credit has
been reduced by $66,910 for outstanding standby letters of credit (see
Note 10). The Company had no borrowing under the line of credit in 1996
or 1995. This line of credit expires on May 1, 1997, unless renewed.
The foregoing bank loans and line of credit are secured by a pledge of
substantially all the assets of the Company.
Page AR-12
<PAGE>
Notes to Consolidated Financial Statements (continued)
The future principal payments required as of September 28, 1996, on
these loans were:
Fiscal Year
___________
1997 1,145,175
1998 450,000
1999 450,000
2000 300,000
____________________________________________________
Total principal payments $ 2,345,175
____________________________________________________
____________________________________________________
Because the Company's debt is at rates that vary with the Prime Rate,
or approximate such rates currently, management believes that the fair
value of the debt is essentially equal to its face value.
(6) Income Taxes
The provisions (credits) for income taxes consist of the following:
<TABLE>
<CAPTION>
September 28, September 30, October 1,
1996 1995 1994
_____________ _____________ __________
<S> <C> <C> <C>
Current:
Federal $ 473,672 $ 21,983 $ 21,704
State 123,027 7,599 6,393
________________________________________________________________
Total current taxes 596,699 29,582 28,097
________________________________________________________________
Deferred:
Federal (336,330) - -
State (82,987) - -
Total deferred taxes (419,317) - -
Total provision $ 177,382 $ 29,582 $ 28,097
________________________________________________________________
________________________________________________________________
</TABLE>
The provisions for income taxes are different from those that would be
obtained by applying the statutory federal income tax rate to earnings
before income taxes due to the following:
<TABLE>
<CAPTION>
September 28, September 30, October 1,
1996 1995 1994
_____________ _____________ __________
<S> <C> <C> <C>
Tax at U.S. statutory rate $ 241,240 $ 40,231 $ 49,009
Benefit of Foreign Sales Corp. (23,604) (29,898) (40,696)
State income taxes,
net of Federal benefit 28,260 3,600 (469)
Tax-exempt interest (6,875) (7,480) (31,250)
Accruals and other 5,861 23,129 51,503
Reduction in valuation (67,500) - -
allowance
_________________________________________________________________________
Total provision $ 177,382 $ 29,582 $ 28,097
_________________________________________________________________________
_________________________________________________________________________
</TABLE>
Page AR-13
<PAGE>
Notes to Consolidated Financial Statements (continued)
Deferred income taxes consist of the following:
<TABLE>
<CAPTION>
September 28, September 30,
1996 1995
______________ ______________
<S> <C> <C>
Goodwill $ 54,874 $ -
Inventory reserve 201,140 213,600
Warranty reserve 243,629 231,502
Payroll related accruals 37,590 40,000
Other 38,238 (63,771)
_________________________________________________________
Total 575,471 421,331
Less: Valuation allowance (353,831) (421,331)
_________________________________________________________
Total $ 221,640 $ -
_________________________________________________________
_________________________________________________________
</TABLE>
The valuation allowance relates to uncertainty regarding the Company's
ability to realize prepaid tax assets against future profits.
Refundable income taxes represent estimated refunds from the federal
government from carryback claims.
(7) Stock Options
At the February 1992 Annual Meeting of Stockholders, the Company adopted
the Technical Communications Corporation 1991 Stock Option Plan (the SOP
Plan) to replace a previous, expired plan. The Company reserved 250,000
shares of common stock for issuance to employees at prices not less than
the fair market value on the date of grant. Options under this plan
generally expire ten years from the date of grant, are exercisable in
cumulative annual increments commencing one year after the date of
grant, and generally vest over a five-year period.
The Company had previously adopted an Incentive Stock Option Plan (the
ISO Plan) that reserved shares of common stock for issuance to employees
at prices not less than the fair market value on the date of grant. The
ISO Plan expired December 15, 1991. Options are still outstanding,
generally expire ten years from the date of grant, are exercisable in
cumulative annual increments commencing one year after the date of
grant, and generally vest over a five-year period.
In 1991, the stockholders approved a Non-Qualified Stock Option Plan
which reserved 50,000 shares of Common Stock for issuance to non-
employee Directors of the Company. These options are issued to
qualifying Directors at prices not less than fair market value on the
date of grant. Options under this plan are exercisable at any time after
the date of grant until expiration, which is five years from the date of
grant.
In fiscal 1996 the Company granted stock options for 50,000 shares to a
key member of management at exercise prices equal to or above the then
current market value. Of these 50,000 shares, the exercise price and
vesting of 40,000 is contingent upon meeting certain milestones that had
not been met by the end of fiscal 1996. If these milestones are met in
the future, that event will fix the vesting period and exercise price.
As a result, the Company will incur compensation expense at that time.
Page AR-14
<PAGE>
Notes to Consolidated Financial Statements (continued)
A summary of stock option transactions follows:
<TABLE>
<CAPTION>
ISO Plan SOP Plan Directors'
Number Number SOP Number
of Shares of Shares of Shares
Under Under Under Option Price
Option Option Option per Share
_________ __________ __________ _____________
<S> <C> <C> <C> <C>
Outstanding at October 2,
1993 (29,000, 3,175 and
3,750 shares exercisable) 30,400 133,000 3,750 $4.00 - 16.75
Granted - 30,750 1,500 8.00 - 15.37
Exercised (12,900) - - 4.00 - 5.00
Canceled - (105,300) (2,250) 4.00 - 16.75
_________________________________________________________________________________
Outstanding at October 1,
1994 (17,250, 12,050 and
3,000 shares exercisable) 17,500 58,450 3,000 $4.00 - 16.75
Granted - 100,750 1,500 7.00 - 10.98
Exercised (2,750) - (500) 4.00 - 7.00
Canceled (100) (10,300) - 10.50 - 15.37
_________________________________________________________________________________
Outstanding at September 30,
1995 (14,525, 14,530 and
4,000 shares exercisable) 14,650 148,900 4,000 $4.00 - 16.75
Granted - 94,700 2,250 8.12 - 12.79
Exercised (4,300) (4,270) (1,500) 4.00 - 12.75
Canceled (500) (19,275) (750) 8.00 - 15.37
_________________________________________________________________________________
Outstanding at September 28,
1996 (9,850, 37,620 and
4,000 shares exercisable) 9,850 220,055 4,000 $4.00 - 16.75
</TABLE>
(8) Profit-Sharing Plan
The Company has a qualified, contributory, trusteed profit-sharing plan
covering substantially all employees. The Company's policy is to fund
contributions as they are accrued. The contributions are allocated based
on the employee's proportionate share of total compensation.
The Company's contributions to the plan are determined by the Board of
Directors and are subject to other specified limitations. Provisions of
approximately $46,000, $40,000, and $20,000 in 1996, 1995 and 1994,
respectively, have been recorded for the Company's contribution to the
profit-sharing plan.
The Company offers no post-retirement benefits as defined in the
Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Post-Retirement Benefits other than Pensions."
(9) Executive Incentive Bonus Plan
The Company has an Executive Incentive Bonus Plan for the benefit of
key management employees. The bonus pool is determined based on the
Company's performance as defined in the plan. During fiscal 1994, no
bonuses were earned but a balance of $71,604 earned in prior years was
distributed among substantially all employees. In fiscal 1995 no
bonuses were earned or paid under this plan. In fiscal 1996 the
Company accrued $104,500 for payment to key management employees
during fiscal 1997. A new plan was adopted by the Board of Directors
for fiscal 1997.
Page AR-15
<PAGE>
Notes to Consolidated Financial Statements (continued)
(10) Off-Balance Sheet Risk and Concentration of Credit Risk
At September 28, 1996, and September 30, 1995, the Company was
contingently liable under open standby letters of credit totaling
$66,910 and $70,833, respectively. These letters of credit are issued
in the ordinary course of business to secure the Company's performance
under contracts with its customers. These letters of credit expire as
provided for in the contracts, unless exercised or renewed. To date,
no letters of credit have been exercised. The Company does not expect
to incur any loss associated with these letters of credit.
As of September 28, 1996, management believes it has no significant
concentrations of credit risk due to placement of its cash equivalents
with high-credit-quality financial institutions, and the fact that the
majority of its foreign trade receivables are secured by letters of
credit or credit insurance.
(11) Related Party Transactions
During 1996, 1995 and 1994, the Company leased a sales office from a
related party; lease payments were $1.00 in each year. The fair value
of such rent is estimated to be below $5,000 per year.
A Director of the Company is a member of a law firm which provides
services to the Company.
On June 27,1995, the Company invested $250,800 for a minority interest
in Series B Preferred Stock of Net2Net Corporation. TCC also entered
into a distribution agreement with Net2Net that gave TCC the exclusive
right to sell Net2Net products to certain U.S. Government departments.
Net2Net's President, Stephen McCalmont, is related to the Chairman and
another Director of Technical Communications Corporation, both of whom
are also investors in Net2Net Corporation.A third Director of the
Company is also an investor in Net2Net Corporation. This investment,
which represents less than a 5% interest, has been accounted for using
the cost method.
(12) Commitments and Contingencies
The Board of Directors has authorized payments of $30,000 per year for
five years to the wife of the Chairman of the Board of Directors,
provided that she survives him, in the event of his death at a time
when he is employed by the Company. The Company carries insurance on
the life of the Chairman sufficient to fund this contingent liability
in full.
The Company is party to various claims arising in the normal course of
business. Management believes that these are adequately provided for
or will result in no significant additional liability to the Company.
(13) Major Customers and Export Sales
In fiscal 1996, the Company had three customers, including the U.S.
Government as one customer, representing 54% (26%,16%, and 12%) of net
sales. In fiscal 1995, the Company had three customers, including the
U.S. Government as one customer, representing 57% (24%, 20%, and 13%)
of net sales. In fiscal 1994, the Company had three customers,
including the U.S. Government, representing 52% (28%, 15% and 9%) of
net sales.
Page AR-16
<PAGE>
Notes to Consolidated Financial Statements (continued)
A breakdown of net sales is as follows:
<TABLE>
<CAPTION>
September 28, September 30, October 1,
1996 1995 1994
______________ ______________ ____________
<S> <C> <C> <C>
Domestic $ 3,633,425 $ 1,535,015 $ 707,735
Foreign $ 10,379,377 $ 8,692,550 $ 8,357,980
__________________________________________________________________
Total $ 14,012,802 $ 10,227,565 $ 9,065,715
__________________________________________________________________
__________________________________________________________________
</TABLE>
A summary of foreign sales by geographic area follows:
<TABLE>
<CAPTION>
September 28, September 30, October 1,
1996 1995 1994
_____________ _____________ __________
<S> <C> <C> <C>
North America
(excluding the U.S.) 1.3% 2.9% 1.4%
Central and South America 6.7% 6.5% 24.0%
Europe 11.6% 14.2% 7.6%
Mid-East and Africa 46.0% 59.7% 62.8%
Far East 34.4% 16.7% 4.2%
</TABLE>
(14) Leases
The Company leases its headquarters and a branch sales office under
operating leases.
The future minimum base rental payments on its triple net headquarters
lease are $146,160 per year for calendar years 1996 through 1997. The
lease expires on December 31, 1997, but can be renewed for one or two
additional two and one-half year terms ending June 30, 2000, and
December 31, 2002. The Company also retains an option to purchase the
building at fair market value but not to exceed $2,262,000,
exercisable at each 2 1/2 year interval during the initial term of the
lease or any renewals thereof.
Base rental expense amounted to $146,160, in each of fiscal years
1996, 1995, and 1994.
(15) Acquisition
Effective May 31, 1995, the Company acquired substantially all of the
assets of Datotek, Inc., a subsidiary of AT&T Corp. Total
consideration paid by the Company was $3,687,000, plus acquisition and
financing costs. The acquisition was financed by the Company's own
capital and a loan from two banks. (The loans from the two banks were
paid off as of November 8, 1996.) Operations resulting from this
acquisition are included in the accompanying consolidated financial
statements from the date of acquisition. The acquisition was accounted
for as a purchase, and accordingly, an allocation of purchase cost to
the Company's assets and liabilities (accounts receivable, inventory,
fixed assets, accounts payable and accruals) was made to reflect fair
values. The allocation results in unallocated excess of purchase cost
over net assets acquired (goodwill) of $1,614,131, which is being
amortized on a straight-line basis over 7 1/2 years. The parties made
an election under the Internal Revenue Code to treat the purchase and
sale agreement as a purchase of assets and assumption of liabilities.
On an unaudited proforma basis, giving effect to the transaction as if
it occurred as of October 1, 1994, net sales for fiscal 1995 would
have been $11,605,000 with a net loss of $235,000 or $.19 per share.
Page AR-17
<PAGE>
Notes to Consolidated Financial Statements (continued)
The proforma net sales and net loss do not purport to represent what
the Company's results of operations would have been if such
transaction in fact had occurred on such date or at the beginning of
the period indicated, or to project the Company's financial position
or results of operations for any future date or period.
(16) Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
September 28, September 30, Estimated
1996 1995 Useful
Life
______________ ______________ __________
<S> <C> <C> <C>
Engineering and
manufacturing equipment $ 1,942,723 $ 1,832,839 3-8 years
Demonstration equipment 785,178 525,635 3-5 years
Furniture and fixtures 1,000,354 806,558 3-8 years
Automobiles 89,899 89,899 5 years
Leasehold Improvements 405,662 371,433 2-5 years
_________________________________________________________________________
Total equipment and
leasehold improvements $ 4,223,816 $ 3,626,364 2-8 years
_________________________________________________________________________
_________________________________________________________________________
</TABLE>
(17) Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is
practicable to estimate that value.
a.) Cash and Cash Equivalents - The carrying amount of these assets
on the Company's Consolidated Balance Sheet approximates their
fair value because of the short maturity of these instruments.
b.) Long-term Debt - The fair value of this long-term indebtedness
approximates the carrying amount since the variable interest rate
paid reflects fair value.
(18) Risks
The Company is exposed to a number of business risks. These include,
but are not limited to, concentration of its business amongst a
relatively small number of customers (see footnote #13), technological
change (which can cause obsolescence of the Company's products and
inventories), actions of competitors (some of whom have access to
considerably greater financial resources than the Company),
cancellation of major contracts (either before or after award),
variations in market demand, the loss of key personnel, etc. The
Company attempts to protect itself in various ways against such risks,
but its success cannot be guaranteed.
(19) Forward-looking Statements
The foregoing footnotes contain forward-looking statements, such as,
but not by way of limitation, expectations of future debt service
requirements, lease payments, etc. In addition, the financial
statements contain estimates by management that also constitute
forward-looking statements, including but not limited to depreciation
rates, adequate levels of inventory, warranty and other reserves,
current values of assets and liabilities, etc., that involve risks and
uncertainties. Actual values and results may be materially different.
In particular, the value of assets and the adequacy of reserves depend
upon future events which cannot be foreseen at this time because they
may be affected by changes in the needs of the Company's customers,
the products and pricing offered by the Company's competitors, general
economic conditions and other factors.
Page AR-18
<PAGE>
Report of Independent Public Accountants
To Technical Communications Corporation:
We have audited the accompanying consolidated balance sheets of Technical
Communications Corporation (a Massachusetts corporation) and its
subsidiaries as of September 28, 1996, and September 30, 1995, and the
related consolidated statements of income, cash flows and stockholders'
equity for the years ended September 28, 1996, September 30, 1995, and
October 1, 1994. These 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits 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
Technical Communications Corporation and subsidiaries as of September 28,
1996, and September 30, 1995, and the results of their operations and their
cash flows for the years ended September 28, 1996, September 30, 1995, and
October 1, 1994, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
_________________________
Boston, Massachusetts
November 6, 1996
Page AR-19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATAED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-28-1996<F1>
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-28-1996
<CASH> 6,381,026<F2>
<SECURITIES> 0
<RECEIVABLES> 3,272,831
<ALLOWANCES> 53,707
<INVENTORY> 2,615,772
<CURRENT-ASSETS> 12,415,044
<PP&E> 4,223,816
<DEPRECIATION> 2,646,683
<TOTAL-ASSETS> 16,000,033
<CURRENT-LIABILITIES> 4,267,276
<BONDS> 0
0
0
<COMMON> 126,450
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 16,000,033
<SALES> 14,012,802
<TOTAL-REVENUES> 14,251,944
<CGS> 5,781,414
<TOTAL-COSTS> 5,781,414
<OTHER-EXPENSES> 5,582,553
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 243,472
<INCOME-PRETAX> 709,529
<INCOME-TAX> 177,382
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 532,147
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
<FN>
<F1>The Company's by-laws call for its fiscal year to end on the Saturday
closest to the last day of September.
<F2>Consists of cash and cash equivalents.
</FN>
</TABLE>
