<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934 for the quarterly period ended June 27, 1998 or
Transition report pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934 for the transition period __________________
to ______________________
Commission File Number: 0-8588
TECHNICAL COMMUNICATIONS CORPORATION
------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2295040
- ------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer 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: (978) 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 6, 1998: 1,283,238.
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets,
as of June 27, 1998 (unaudited) and September 27, 1997 1
Condensed Consolidated Statements of Operations, Three (3)
months ended June 27, 1998 and June 28, 1997 (unaudited),
Nine (9) months ended June 27, 1998 and June 28, 1997 (unaudited) 2
Condensed Consolidated Statements of Cash Flows,
Nine (9) months ended June 27, 1998 and June 28, 1997 (unaudited) 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 8
PART II Other Information 10
Signatures 12
</TABLE>
<PAGE>
PART I. Financial Information - Item 1. Financial Statements
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 27, September 27,
1998 1997
(Unaudited)
----------- ------------
<S> <C> <C>
Assets
- ------
Current Assets:
Cash and cash equivalents $ 714,827 $ 1,876,748
Accounts receivable - trade, less allowance for doubtful accounts
of $51,000 and $25,000 at 6/27/98 and 9/27/97, respectively 3,402,623 3,259,549
Unbilled revenue 3,780,754 198,038
Inventories (Note 1) 3,737,925 3,423,979
Other current assets 494,131 727,759
---------- ---------
Total current assets $ 12,130,260 $ 9,486,073
Equipment and leasehold improvements 4,671,366 4,382,655
Less: accumulated depreciation and amortization 3,595,746 3,200,075
--------- ---------
1,075,620 1,182,580
Goodwill 1,614,131 1,614,131
Less: accumulated amortization 662,715 501,533
--------- -------
951,416 1,112,598
Other assets 796,259 675,002
--------- -------
$ 14,953,555 $ 12,456,253
---------- ----------
---------- ----------
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities:
Obligations under capital lease - current portion $ 5,170 $ -
Accounts payable 412,713 861,633
Revolving line of credit (Note 2)
2,750,000 -
Accrued liabilities
Compensation and related expenses 279,521 290,093
Other 1,659,363 1,794,481
--------- ---------
Total current liabilities $ 5,106,767 $ 2,946,207
--------- ---------
Long-term obligations under capital lease 14,215 -
Commitments and contingencies (Note 3)
Stockholders' Equity:
Common stock, par value $.10 per share; authorized 3,500,000
shares; issued and outstanding 1,283,238 shares at 6/27/98 and
1,273,703 shares at 9/27/97 128,324 127,370
Additional paid-in capital 1,228,197 1,526,110
ESOP deferred compensation (Note 2) - (527,772)
Retained earnings 8,736,176 8,464,338
Less treasury stock at cost, 35,733 shares and 10,000 shares at
6/27/98 and 9/27/97, respectively (260,124) (80,000)
--------- -------
Total stockholders' equity $ 9,832,573 $ 9,510,046
--------- ---------
$ 14,953,555 $ 12,456,253
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Page 1
<PAGE>
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
-------------- -----------------
June 27, 1998 June 28, 1997 June 27, 1998 June 28, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales $ 3,281,399 $ 2,027,070 $ 9,621,904 $ 9,139,532
Cost of Sales 1,157,505 1,223,660 4,023,464 3,818,223
--------- --------- --------- ---------
Gross Profit 2,123,894 803,410 5,598,440 5,321,309
Operating Expenses:
Selling, general and
administrative expenses 1,385,374 1,400,167 4,256,810 4,756,047
Product development costs 378,347 763,785 911,703 1,766,125
--------- ---------- --------- ---------
1,763,721 2,163,952 5,168,513 6,522,172
--------- ---------- --------- ---------
Operating Profit (Loss) 360,173 (1,360,542) 429,927 (1,200,863)
--------- ----------- --------- -----------
Other Income (Expense)
Interest income 3,396 36,222 20,789 120,667
Interest expense (65,587) (12,807) (96,714) (56,535)
Other income (expense) (1,429) 5,501 8,449 15,727
---------- ---------- --------- ----------
(63,620) 28,916 (67,476) 79,859
---------- ---------- --------- ----------
Income (loss) before income taxes 296,553 (1,331,626) 362,451 (1,121,004)
Provision (benefit) for income taxes 74,138 (332,952) 90,613 (280,205)
--------- ---------- --------- -----------
Net Income (Loss) $ 222,415 $ (998,674) $ 271,838 $ (840,799)
--------- ---------- --------- -----------
--------- ---------- --------- -----------
Net Income (Loss) Per Common
Share (Note 4):
Basic $ .17 $ ( .78) $ .21 $ (.66)
Diluted $ .17 $ (.78) $ .21 $ (.66)
Weighted Avg. Shares Used in
Computation:
Basic 1,283,238 1,272,401 1,281,452 1,269,599
Diluted 1,287,729 1,272,401 1,288,620 1,269,599
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Page 2
<PAGE>
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 27, 1998 June 28, 1997
------------- -------------
<S> <C> <C>
Operating Activities:
Net income (loss) $ 271,838 $ (840,799)
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation and amortization 605,611 655,140
Non-cash compensation associated with ESOP - 139,446
Changes in assets and liabilities:
(Increase) in accounts receivable (143,074) (2,817,965)
(Increase) in unbilled revenue (3,582,716) -
(Increase) in inventories (313,946) (757,151)
Decrease in refundable income taxes 233,426 -
(Increase) decrease in other current assets 202 (35,723)
(Increase) in other assets (121,257) (947,174)
Increase (decrease) in accounts payable and other accrued
liabilities (594,610) 1,066,350
--------- ---------
Net cash provided (used) by operating activities (3,644,526) (3,537,876)
Investing Activities:
Additions to equipment and leasehold improvements (318,084) (211,367)
--------- ---------
Net cash used by investing activities (318,084) (211,367)
Financing Activities:
Proceeds from stock issuance 50,689 53,388
Borrowings under line of credit 3,250,000 500,000
Payment of debt (500,000) (1,854,064)
--------- ----------
Net cash provided (used) by financing activities 2,800,689 (1,300,676)
Net (decrease) in cash and cash equivalents (1,161,921) (5,049,919)
Cash and cash equivalents at beginning of the period 1,876,748 6,381,026
--------- ---------
Cash and cash equivalents at the end of the period $ 714,827 $ 1,331,107
--------- ----------
--------- ----------
Supplemental Disclosures:
Interest paid $ 96,714 $ 56,535
Income taxes paid (refunds received), net (221,072) 664,026
</TABLE>
Non-cash Transactions
The Company's ESOP was terminated effective October 1, 1997. As a result of
the termination, the Company reacquired 25,733 of remaining unallocated
shares of its common stock in a treasury stock transaction.
During the nine months ended June 27, 1998, the Company incurred a capital
lease obligation of $20,370 in connection with a lease agreement to acquire
computer equipment.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3
<PAGE>
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FORWARD-LOOKING STATEMENTS
Note: The discussions in this Form 10-Q, including any discussions of or
impact, expressed or implied, on Technical Communications Corporation's (the
"Company") anticipated operating results and future earnings contain forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended. The Company's results may differ significantly from the
results indicated by such forward-looking statements. The Company's operating
results may be affected by many factors, including but not limited to, the
fulfillment of customer orders, the Company's ability to retain and motivate
key technical and manufacturing personnel, and the possibility of political
instability in the Company's foreign markets. These and other risks are
detailed from time to time in the Company's filings with the Securities &
Exchange Commission, including this Form 10-Q for the period ended June 27,
1998.
STATEMENT OF FAIR PRESENTATION
Interim Financial Statements. The accompanying unaudited condensed
consolidated 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 disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have 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 27, 1997 as
filed with the Securities and Exchange Commission on Form 10-K.
NOTE 1. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
June 27, 1998 September 27, 1997
------------- ------------------
<S> <C> <C>
Finished Goods $ 117,403 $ 64,781
Work in Process 1,169,722 1,220,152
Raw Materials 2,450,800 2,139,046
--------- ---------
$ 3,737,925 $ 3,423,979
--------- ---------
--------- ---------
</TABLE>
NOTE 2. Long-Term Debt
As of June 27, 1998, the Company had a $5,000,000 revolving line of credit at
a rate of prime plus 1/2 of 1% with Wainwright Bank and Trust Company. This
line of credit is secured by a pledge of substantially all the assets of the
Company, requires no compensating balances, and is due to mature on May 1,
1999. Under the terms of the line of credit agreement, the Company is
required to comply with certain loan covenants. As of June 27, 1998 the
Company is compliant with these covenants. Availability under the line of
credit has been reduced by $3,633,110 as of June 27, 1998, as a result of
outstanding borrowings of $2,7500,000 and standby letters of credit of
$883,110. Current borrowings are expected to be repaid from cash generated by
normal operating activities.
Notes to Condensed Consolidated Financial Statements (continued)
Page 4
<PAGE>
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 acted as a guarantor
on the outstanding loans and, as a result, recorded the principal balance of
such loans on its balance sheet as short-term and long-term debt with an
offsetting charge to "ESOP Deferred Compensation" within the Stockholders'
Equity section.
On April 30, 1997, the Company provided a loan of $82,702 to the Trust in
order to pay off the remaining balance of the 1990 bank loan. This new loan,
which bore interest at 9% per annum, required equal monthly payments of
principal of $3,446, commencing on May 31, 1997. On August 28, 1997, the
Company provided a second loan of $472,222 to the Trust in order to pay off
the 1991 bank loan. This second Company loan to the Trust bore interest at
13.6% per annum and required equal monthly principal payments of $9,838
beginning on September 28, 1997. The Employee Stock Ownership Plan (ESOP) was
terminated by the Board of Directors effective October 1, 1997, at which time
these loans to the Trust were eliminated and the remaining 25,733 of
unallocated shares were reacquired by the Company as treasury stock.
Until the ESOP's termination, the Company made contributions to the Trust
sufficient to pay all principal and interest on the various loans when due.
Because the payment of principal resulted in the release of shares from
collateral, which shares were then available for allocation to employees, the
principal portion of these contributions was recorded as compensation
expense. Such contributions were, therefore, expensed to compensation and
interest when they were made or accrued.
NOTE 3. Commitments and Contingencies
On April 6, 1998, the Company entered into a capital lease for computer
equipment valued and recorded at $20,370 under equipment and leasehold
improvements. The lease term is for three years and contains a bargain
purchase option which may be exercised upon lease expiration. The capital
lease for $88,840 recorded during the quarter ended March 28, 1998 was
dissolved and the assets purchased during the quarter just ended.
In connection with the acquisition of the assets of Datotek, Inc., a
subsidiary of AT&T Corp., in May 1995, the Company entered into a reseller
agreement whereby it would commit to minimum annual and cumulative purchase
levels of various AT&T Secure Communications System's products (now General
Dynamics), in exchange for exclusive international distribution rights.
Initially renewable at the end of each of the first three years (plus two
additional option years), the agreement was modified in October 1997 as a
result of the Company's commitment to purchase $850,000 and $1,000,000 for
the years ended September 30, 1998 and September 30, 1999, respectively.
Although the Company expects to receive customer orders sufficient to meet
these minimum purchases, no assurances can be given that such orders will be
received.
Effective February 16, 1998 and March 2, 1998 the Company entered into
employment agreements with two executive officers. The first agreement
provides for an annual base salary calculated at $160 per hour up to a
maximum of 24 hours per week. The second agreement provides for a base salary
of
Page 5
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
$125,000 calculated on a full-time basis. Both agreements are subject to
adjustment from time-to-time at the discretion of the Company's Board of
Directors and provide for severance payments of up to but not more than one
year's base salary for termination other than for cause.
In May 1998 the former president of the Company, Roland S. Gerard,
brought an action relating to his employment with the Company. In the action,
Mr. Gerard alleges, among other things, that he was induced to enter into his
employment based on false or misleading representations concerning the
Company's financial status and operations, and that he did not discover the
truth until two years after he became president and three months after he
became a director. Finally, he asserts his termination was improper for
public policy reasons. He is requesting unspecified damages. The Company
strongly disputes these allegations and has filed a motion to dismiss the
Complaint on multiple grounds. Although no assurance can be given as to the
outcome of such action, the Company intends to vigorously defend the action.
On May 22, 1998, one of the Company's directors, Philip Phalon,
joined an individual stockholder named M. Mahmud Awan in a lawsuit against
the Company and its directors (other than Mr. Phalon), filed in Massachusetts
Superior Court, Middlesex County (the "Court"), entitled Philip A. Phalon and
M. Mahmud Awan v. Technical Communications Corporation, Arnold McCalmont,
Herbert A. Lerner, Robert T. Lessard, Carl H. Guild, Mitchell B. Briskin,
Donald Lake and Thomas E. Peoples, Civil Action No. 98-2553 (the "Group
Lawsuit"). In the Group Lawsuit, the plaintiffs, which include Mr. Phalon, a
long-time director and former acting President of the Company, allege a
breach of fiduciary duty by directors relating to actions of the Board
including improper denial of access to stockholder information.
No damages have been sought in the litigation although plaintiffs
have indicated they will seek their attorneys' fees and other costs
associated with the Group Lawsuit, currently estimated at approximately
$300,000, if they prevail. Although no assurance can be given as to the
outcome of such action, the Company intends to vigorously pursue the matter.
NOTE 4. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which
established standards for computing and presenting earnings per share (EPS)
for entities with publicly held common stock. SFAS No. 128 is effective for
periods ending after December 15, 1997, including interim periods, and early
adoption was not permitted. After the effective date, all prior period EPS
data presented must be restated to conform with the provisions of this
statement, which includes the presentation of both a "Basic" and a "Diluted"
EPS. Basic EPS has been computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. In
computing diluted EPS, only stock options that are dilutive; those that
reduce earnings per share, have been included in the calculation of EPS using
the Treasury Stock Method. Exercise of outstanding stock options is not
assumed if the result would be antidilutive, such as when a net loss is
reported for the period or the option exercise price is greater than the
average market price for the period presented. The following table presents
EPS under this new standard, including the restatement of prior years' EPS.
Page 6
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended June 27, 1998
----------------------------------------
Per Share
Net Income Shares Amount
---------- ------ ------
<S> <C> <C> <C>
Basic Earnings Per Share $ 222,415 1,283,238 $ .17
-----
-----
Outstanding dilutive stock options with grant
price less than average market price - 4,491
--------- ---------
Diluted Earnings Per Share $ 222,415 1,287,729 $ .17
--------- --------- -----
--------- --------- -----
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended June 27, 1998
---------------------------------------
Per Share
Net Income Shares Amount
---------- ------ ------
<S> <C> <C> <C>
Basic Earnings Per Share $ 271,838 1,281,452 $ .21
-----
-----
Outstanding dilutive stock options with grant
price less than average market price - 7,168
--------- ---------
Diluted Earnings Per Share $ 271,838 1,288,620 $ .21
--------- --------- -----
--------- --------- -----
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended June 28, 1997
----------------------------------------
Per Share
Net Loss Shares Amount
-------- ------ ------
<S> <C> <C> <C>
Basic Loss Per Share $ (998,674) 1,272,401 $ (.78)
-------
-------
Outstanding dilutive stock options with grant
price less than average market price - -
---------- ---------
Diluted Loss Per Share $ (998,674) 1,272,401 $ (.78)
---------- --------- -------
---------- --------- -------
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended June 28, 1997
---------------------------------------
Per Share
Net Loss Shares Amount
-------- ------ ------
<S> <C> <C> <C>
Basic Loss Per Share $ (840,799) 1,269,599 $ (.66)
-------
-------
Outstanding dilutive stock options with grant
price less than average market price - -
---------- ---------
Diluted Loss Per Share $ (840,799) 1,269,599 $ (.66)
----------- --------- -------
----------- --------- -------
</TABLE>
Page 7
<PAGE>
PART I, Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
The Company is in the business of designing, manufacturing and marketing
communications security equipment. The Company receives orders for equipment
from customers which may take several months or longer to manufacture and
ship. With the exception of long-term contracts where revenue is recognized
under the percentage of completion method, the Company generally recognizes
income on a unit-of-delivery basis. This latter method can cause revenues to
vary widely from quarter to quarter and therefore quarterly comparisons of
revenue may not be indicative of any trend.
The Company's backlog of firm orders as of June 27, 1998 was $4,183,835
representing a decrease of $6,456,854 from $10,640,689 reported as of
September 27, 1997. The decrease is predominantly the result of recognizing
$5,760,485 in revenue under the percentage of completion method on a
long-term contract, the final shipment of which is expected to be delivered
in the fourth quarter of the current fiscal year. The Company expects to
deliver substantially all of its current backlog in fiscal 1998.
Net sales for the quarter ended June 27, 1998 and June 28, 1997, were
$3,281,399 and $2,027,070, respectively. For the nine months ended June 27,
1998 and June 28, 1997, net sales were $9,621,904 and $9,139,532,
respectively. This increase of 62% in third quarter net sales and 5% in
year-to-date net sales is attributed to variability in revenue recognition as
a result of the timing of shipments, the receipt of anticipated orders, and
the recognition of revenue using the percentage of completion method for the
large contract already mentioned.
Gross profit for the third quarter of fiscal year 1998 was $2,123,894, as
compared to gross profit of $803,410 for the third quarter of fiscal year
1997. For the first nine months of fiscal 1998 gross profit totaled
$5,598,440, as compared with $5,321,309 for the same period in fiscal 1997.
This represented a 164% increase in gross profit for the quarter and a 5%
increase on a year-to-date basis. Gross profit expressed as a percentage of
sales was 65% in the third quarter and 58% in the first nine months of fiscal
year 1998, as compared to 40% in the third quarter and 58% in the first nine
months of fiscal year 1997. As completion of the long term contract neared,
its favorable cost performance resulted in an increased gross profit margin
in the third quarter and brought the nine month results in line with the
prior year.
Operating expenses for the third quarter and first nine months of fiscal 1998
were $1,763,721 and $5,168,513, respectively. For the third quarter and first
nine months of fiscal 1997 operating expenses were $2,163,952 and $6,522,172
respectively This decrease of 19% in the quarter and 21% in the first nine
months was primarily due to successful implementation of operating cost
reductions, lower product development costs, and the ongoing capitalization
of Keynet(TM) II, the Company's next generation of key and device management
system software.
As a result of the Company's reduction in cash available for investment and a
significant use of borrowings on its line of credit to fund working capital
requirements, other income and expense declined from a net income position of
$28,916 and $79,859 for the third quarter and nine months of fiscal 1997 to a
net expense of $63,620 and $67,476 for the same periods in the current year.
Keynet is a trademark of Technical Communications Corporation
Page 8
<PAGE>
Management's Discussion and Analysis (continued)
After-tax income for the third quarter and first nine months of fiscal year
1998 was $222,415 or $.17 per share and $271,838 or $.21 per share,
respectively. The after-tax loss in the third quarter and first nine months
of fiscal year 1997 was $(998,674) or $(.78) per share, and $(840,799) or
$(.66) per share, respectively. The improvement in earnings for the quarter
are a result of a 62% increase in net sales, the improved gross margin in the
product mix, and the reduction in operating expenses previously mentioned.
Year-to-date earnings are higher for the first nine months of fiscal 1998 in
comparison to the first nine months of 1997 primarily for the same reasons.
Year 2000 Compliance
Many of the Company's products as well as many currently installed computer
systems and software products used internally could be affected by the date
changes resulting from the transition into the Year 2000.
The company has formed a Year 2000 task force. The task force consists of a
project manager and a number of engineering, customer service, and
administrative employees who have been assigned responsibility for completing
a Year 2000 compliance plan. The scope of this plan is to (i) evaluate
Company products and develop solutions, where appropriate, for those products
that are not compatible with 21st century dates, (ii) identify the
third-party equipment, software, vendors, internal systems and suppliers used
by the Company which are not Year 2000 compliant, (iii) replace non-compliant
third-party equipment and software with compliant equipment and software and
find alternatives to non-compliant vendors, systems, and suppliers, and (iv)
work with Company customers to answer questions and concerns they may have
about the impact of Year 2000 compliance on the Company and its products.
To date, a number of Company products have already been evaluated for Year
2000 readiness, and where necessary, solutions have been developed to cure
noted problems. Certain key internal computer information, manufacturing, and
network operating systems have already been upgraded to be Year 2000
compliant. Although the Year 2000 compliance plan and a subsequent full cost
analysis will not be completed until the end of August 1998, the Company does
not believe the financial impact of the Year 2000 issue will be material.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. FAS
No. 133 is effective for fiscal years beginning after June 15, 1999.
Management does not expect the adoption of this statement to have a material
impact on its financial condition or results of operations.
Liquidity and Capital Resources
Cash and short-term investments decreased by $1,161,921 or 62% to $714,827 as
of June 27, 1998, from a balance of $1,876,748 at September 27, 1997. This
decrease was primarily due to the use of $3,644,526 in cash for operating
activities, predominately as a result of an increase of $3,582,716 in
unbilled revenue associated with the long-term percentage of completion
contract discussed under Results of Operations. To support the cash
requirements during the nine months ended June 27, 1998, the Company borrowed
$3,250,000 from its line of credit, of which $2,750,000 remains outstanding
at June 27, 1998. The current ratio declined to 2.4:1 at June 27, 1998,
compared to 3.2:1 as of September 27, 1997, primarily as a result of the
$2,750,000 outstanding under the line of credit and the lower cash balance.
As of June 27, 1998, the Company had a $5,000,000 line of credit at a rate of
prime plus 1/2 of 1% with Wainwright Bank and Trust Company. This line of
credit is secured by a pledge of substantially all the assets of the Company,
requires no compensating balances, and is due to mature on May 1, 1999. Under
the terms of the line of credit agreement, the Company is required to comply
with certain loan covenants. As of June 27, 1998 the Company is compliant
with these covenants. Availability under the line of credit has been reduced
by $3,633,110 as of June 27, 1998, as a result of outstanding borrowings of
$2,750,000 and standby letters of credit of $883,110. Current borrowings are
expected to be repaid from cash generated by normal operating activities. In
the prior year during the nine months ended June 28, 1997, the Company
borrowed $500,000 under its line of credit.
Information on the Company's long-term debt is to be found on Page 4, Note 2,
"Long-Term Debt" of this Form 10-Q.
Management anticipates no unusual capital expenditures during the remainder
of fiscal 1998.
Page 9
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings:
In May 1998 the former president of the Company, Roland S. Gerard,
brought an action relating to his employment with the Company. In the action,
Mr. Gerard alleges, among other things, that he was induced to enter into his
employment based on false or misleading representations concerning the
Company's financial status and operations, and that he did not discover the
truth until two years after he became president and three months after he
became a director. Finally, he asserts his termination was improper for
public policy reasons. He is requesting unspecified damages. The Company
strongly disputes these allegations and has filed a motion to dismiss the
Complaint on multiple grounds. Although no assurance can be given as to the
outcome of such action, the Company intends to vigorously defend the action.
On May 22, 1998, one of the Company's directors, Philip Phalon,
joined an individual stockholder named M. Mahmud Awan in a lawsuit against
the Company and its directors (other than Mr. Phalon), filed in Massachusetts
Superior Court, Middlesex County (the "Court"), entitled Philip A. Phalon and
M. Mahmud Awan v. Technical Communications Corporation, Arnold McCalmont,
Herbert A. Lerner, Robert T. Lessard, Carl H. Guild, Mitchell B. Briskin,
Donald Lake and Thomas E. Peoples, Civil Action No. 98-2553 (the "Group
Lawsuit"). In the Group Lawsuit, the plaintiffs, which include Mr. Phalon, a
long-time director and former acting President of the Company, allege a
breach of fiduciary duty by directors relating to actions of the Board
including improper denial of access to stockholder information.
No damages have been sought in the litigation although plaintiffs
have indicated they will seek their attorneys' fees and other costs
associated with the Group Lawsuit, currently estimated at approximately
$300,000, if they prevail. Although no assurance can be given as to the
outcome of such action, the Company intends to vigorously pursue the matter.
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:
None.
Item 5. Other Information:
None.
Page 10
<PAGE>
Item 6. Exhibits and Reports on Form 8-K:
a. Exhibits:
Statement regarding computation of per-share earnings: reference
is made to Note 4 of the Notes to the Condensed Consolidated
Financial Statements on page 6 of this Quarterly Report on Form
10-Q.
Exhibit 27: Financial Data Schedule
b. Reports on Form 8-K:
On May 5, 1998, the Company filed a Current Report on Form 8-K
reporting under Item 5 that its By-Laws had been amended on
April 30, 1998 to increase the percentage in interest of the
Company's capital stock required to call a special meeting of
the stockholders. The Company further reported that its Board of
Directors voted on April 30, 1998, to subject the Company to
Section 50A of Massachusetts General Laws as well as reported
that three new outside directors had been elected to its Board.
On June 12, 1998, the Company filed a Current Report on Form 8-K
reporting under Item 5 the results of an action filed by certain
dissenting shareholders in the Massachusetts Superior court
against the Company and certain of its directors.
Page 11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHNICAL COMMUNICATIONS CORPORATION
------------------------------------
(Registrant)
August 6, 1998 By: /s/ Carl H. Guild, Jr.
- -------------- ----------------------------------
Date CARL H. GUILD, JR., CHAIRMAN
AND CHIEF EXECUTIVE OFFICER
August 6, 1998 By: /s/ Herbert A. Lerner
- -------------- ----------------------------------
Date HERBERT A. LERNER, CHIEF FINANCIAL
OFFICER
Page 12
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