<PAGE>
For the fiscal year ended Commission File Number
September 27, 1997 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)
<TABLE>
<CAPTION>
<S> <C>
Massachusetts 04-2295040
- --------------------------------------------- -----------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
100 Domino Drive, Concord, MA 01742-2892
- --------------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip code)
(978) 287-5100
- ---------------------------------------------
(Registrant's telephone number, including
area code)
Securities registered pursuant to Section 12 (b) of the Act:
None None
- --------------------------------------------- ------------------------------------------
(Title of each class) (Name of each exchange on which registered)
</TABLE>
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.
/CHECK/
Based on the closing price of the stock as of December 12, 1997, 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 12, 1997, was
approximately $8,983,000.
The number of shares of the registrant's Common Stock, par value $
.10 per share, outstanding as of December 12, 1997, was 1,283,238.
<PAGE>
FORWARD-LOOKING STATEMENTS
NOTE: THE DISCUSSIONS IN THIS FORM 10-K, INCLUDING ANY DISCUSSION 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 AFECTED 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-K FOR FISCAL YEAR ENDED SEPTEMBER 27, 1997.
PART I
Item 1. BUSINESS
(a) General
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, marketing, 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, marketing, 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 an encrypted format and permit
receivers to reconstitute the information in a deciphered 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.
(d) Products
Products currently available or under development provide
communications security solutions within network, voice and facsimile,
centralized key and device management, and military ciphering applications.
Network Security
The Cipher X 7000-Registered Trademark- Series is a family of
high-speed, high-performance hardware/software-based encryptors for LAN/WAN
and internet applications. All of the systems have been designed for complete
node-to-node protection and therefore provide node authentication and access
control, as well as data integrity. This family of products also utilizes a
modular architecture that permits the software to be updated as networks
migrate to emerging protocols. Network transparent, the products support U.S.
Government-backed DES and proprietary algorithms as well as ANSI X9.17 and
public key management. Specific products within this family support Frame
Relay, IP, and X.25 protocols.
2
<PAGE>
Voice and Facsimile Security
The CSD 3600 Secure Portable Telephone Attachment may be placed
between any telephone and handset worldwide to provide high-end digital
security. Small and portable, the CSD 3600 operates over both digital and
analog telephone lines, and is designed to ensure protection through new and
unique random keys negotiated with each communication session.
The CSD 9300 Secure Cellular Telephone is a high level secure system
that combines the ease of use of the CSD 3600 with a full-featured AMPs
compatible cellular telephone. Protection is designed to be ensured by
randomly generated keys, unique to each communication session.
The 4100 Executive Secure Telephone offers strategic level voice and
data security in a full featured executive telephone package. Exceptional
voice quality is achieved with three different voice coding algorithms. The
product supports multiple security layers such as automated key management,
authentication, certification, and access control. Video and telephone
conferencing options are also available.
The CSD 3700 Fax Security System is a highly secure, automatic
transmission fax system that connects to any Group 3 fax machine via a 2-wire
interface. Security protection is achieved with Diffie-Hellman negotiated key
technology and randomly generated keys that are unique to each communication
session. Open and closed networks are supported by the CSD 3700 to enable an
open exchange of secure documents in the industrial marketplace, or restrict
secure communications to only authorized parties in highly confidential or
government applications.
The CSD 3224E Secure Telephone, Fax and Data, is a desktop office
system that provides protection for telephone, fax and data communications.
The product was designed to guarantee secure voice communications over
extremely degraded line conditions, while achieving exceptional voice quality
with speaker recognition. The CSD 3324E connects to any Group 3 compatible
fax machine, and to a computer via a RS-232 interface.
Centralized Security Management
The Company's Keynet-TM- Key and Device Management System is a
Windows NT-based key and security device management system that can centrally
and simultaneously manage an entire Cipher X 7000 network, including those on
mixed networks such as high-speed X.25, Frame Relay and IP. The system
securely generates, distributes and exchanges keys, sets address tables,
provides diagnostics, and performs automatic polling and alarms from a
central and remote location. Keynet II also operates with SNMP-based
management systems for ease-of-use, and provides instant alarm notification
via a tone, pager or SNMP trap.
Military Ciphering Systems
The DSP 9000 Narrowband Radio Security family of products provide
strategic security for voice and data communications sent over HF, VHF and
UHF channels in full and half-duplex modes. Designed for rugged military
environments, the DSP 9000 provides exceptional voice quality over poor line
connections making it an ideal security solution for military aircraft,
naval, base station and manpack radio applications. The product provides
automated key management for optimum security and ease of use. It is also
radio independent because software programmable interfaces allow radio
interface levels to be changed without configuring the hardware. Base
station, handset and implant board configurations are available options with
the DSP 9000. Additionally, the DSP 9000 is compatible with the Company's CSD
3324E secure telephone to enable "office-to-field" communications.
The DSD 72A-SP High Speed Data Encryptor is a rugged military bulk
ciphering system that provides a maximum level of cryptographic security for
synchronous data networks operating at up to 8 Mbps. The product supports a
wide variety of interfaces and easily integrates into existing networks.
Reliable secure communications is ensured with crypto synchronization methods
built to maintain connections in error and jamming environments such as radio
relay networks, missile systems, and microwave systems.
(e) Competition
The Company has several competitors, including foreign-based
companies, in the communications security devices field. Few of these
competitors offer products that compete across all of the Company's product
offerings and none are believed to have a dominant share of the market. Many
of these competitors, however, are companies which may have greater financial
and other resources than the Company. The Company believes its principal
competitors include Crypto AG, Racal Datacom Inc., Cylink
3
<PAGE>
Corporation, Motorola Inc., Omnisec AG, Harris Corporation, Transcript
International, Cisco Systems, Information Resource Engineering Inc., and
TimeStep Corporation.
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.
(f) Sales and Backlog
In fiscal 1997, the Company had three customers representing 51%
(25%, 13%, and 13%) of net 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.
The Company expects that sales to relatively few customers will
continue to account for a high percentage of the Company's revenues in any
accounting period in the foreseeable future. A reduction in orders from any
such customer, or the cancellation of any significant order and failure to
replace such order with orders from other customers, would have a material
adverse effect on the Company's business, financial condition, and results of
operations.
The Company's backlog of firm orders as of September 27, 1997 was
$10,640,689, compared to $4,756,845 as of September 28, 1996. The Company
expects to deliver substantially all of its backlog in fiscal year 1998.
(g) Regulatory Matters
As a party to a number of contracts with the U.S. Government and its
agencies, the Company must comply with extensive regulations with respect to
bid proposals and billing practices. Should the U.S. Government or its
agencies conclude that the Company has not adhered to federal regulations,
any contracts to which the Company is a party could be canceled and the
Company could be prohibited from bidding on future contracts. Such a
prohibition would have a material adverse effect on the Company. All payments
to the Company for work performed on contracts with agencies of the U.S.
Government are subject to adjustment upon audit by the U.S. Government
Defense Contract Audit Agency, the General Accounting Office, and other
agencies. The Company could be required to return any payments received from
U.S. Government agencies if it is found to have violated federal regulations.
In addition, U.S. Government contracts may be canceled at any time by the
government with limited or no penalty. Contract awards are also subject to
funding approval from the U.S. Government which involves political,
budgetary, and other considerations over which the Company has no control.
The Company's security products are subject to export restrictions
administered by the U.S. Department of Commerce, which licenses the export of
encryption products subject to certain technical restrictions. In addition,
U.S. export laws prohibit the export of encryption products to a number of
hostile countries. Although to date the Company has been able to secure U.S.
export licenses, there can be no assurance that the Company will continue to
be able to secure such licenses in a timely manner in the future, or at all.
(h) Manufacturing and Technical Expertise
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.
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.
4
<PAGE>
(i) Research and Development
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. No assurances
can be given that the Company will be able to hire, train, and motivate such
technical management and sales personnel. During the twelve-month periods
ended September 27, 1997, September 28, 1996, and September 30, 1995, the
Company spent $2,378,564, $1,955,852, and $1,492,370, respectively, on
product development.
(j) Employees
As of September 27, 1997, the Company employed 61 persons. The
Company believes that its relationship with its employees is good.
(k) Foreign Operations
The Company is dependent upon its foreign sales. Foreign sales were
more profitable than domestic sales during fiscal years 1997 and 1995 because
the mix of products sold abroad included more products with higher profit
margins than the mix of products sold domestically. During fiscal year 1996
foreign and domestic sales were equally profitable. The fluctuation from
year-to-year does not present a predictable 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. Foreign sales
contracts are usually in U.S. dollars. However, when payment terms are in
foreign currencies, the Company hedges the transactions 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 ("TCC FSC") which is
organized and incorporated in the U.S. Virgin Islands. As a qualified Foreign
Sales Corporation under the Internal Revenue Code, TCC FSC is able to take
advantage of tax incentives enacted by Congress to encourage export sales.
Information regarding the Company's revenue from export sales for the
past five years is set forth in Item 6, "SELECTED FINANCIAL DATA" (Pages 6-7).
Item 2. PROPERTIES
The Company leases its headquarters located in Concord,
Massachusetts, under an operating lease.
On October 16, 1992, the Company signed its current lease on its
headquarters. The Company has exercised its option to extend this lease for
the first of two additional two and one-half year terms ending June 30, 2000
and December 31, 2002. The future minimum lease payments under this first
option term depend on the Consumer Price Index at December 31, 1997, but are
estimated at $158,700 a year through fiscal 1999 and $119,000 for the first
nine months of fiscal 2000. The Company also retains an option to purchase
the building at fair market value, but not to exceed $2,262,000, exercisable
at the end of the current renewal term, and of the additional renewal term,
if elected.
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.
5
<PAGE>
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
--------------------
<S> <C> <C> <C>
TITLE OF CLASS QUARTER ENDING LOW HIGH
- -------------------------------------------------------------------- -------------- --------- ---------
Common Stock, $.10 par value
12/30/95 $ 7.250 $ 10.250
03/30/96 6.750 9.000
06/29/96 7.500 32.000
09/28/96 8.750 18.000
12/28/96 8.750 15.750
03/29/97 9.625 14.125
06/28/97 7.875 10.375
09/27/97 5.000 9.000
</TABLE>
The Company has paid no cash dividends in the past and has no plans
to pay cash dividends in the future.
As of December 12, 1997, there were approximately 1,300 record holders of
Common Stock, $ .10 par value. As of December 12, 1997, the low and high
prices of the Common Stock were $7.000 and $7.000.
Item 6. SELECTED FINANCIAL DATA
Selected Financial Data:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED:
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30, OCTOBER 1, OCTOBER 2,
1997 1996 1995 1994 1993
------------- ------------- --------------- ---------- ------------
Net Sales:
Domestic......................... $ 2,734,690 $ 3,633,425 $ 1,535,015 $ 707,735 $ 3,043,963
Foreign (Note B)................. 9,523,948 10,379,377 8,692,550 8,357,980 6,679,220
------------- ------------- --------------- ---------- ------------
Total net sales.................... 12,258,638(C) 14,012,802(C) 10,227,565(C) 9,065,715 9,723,183
Gross profit....................... 7,104,975 8,231,388 5,351,882 5,294,825 5,056,996
Net income (loss).................. (1,243,501) 532,147 88,745 116,046 83,440
Net income per share of common
stock (Note A)................... $ (.98) $ .42 $ .07 $ .09 $ .07
Weighted average shares
outstanding...................... 1,270,625 1,257,384 1,252,567 1,245,410 1,238,211
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
AS OF:
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30, OCTOBER 1, OCTOBER 2,
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
Assets................................... $ 12,456,253 $ 16,000,033 $ 15,348,435 $ 12,088,955 $ 12,019,465
Current portion, long-term debt.......... $ -- $ 1,145,175 $ 696,136 $ 246,136 $ 1,088,203
Long-term obligations.................... $ -- $ 1,200,000 $ 2,550,612 $ 1,132,748 $ 550,386
</TABLE>
- ------------------------
Notes to Selected Financial Data
(A) 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) A summary of foreign sales by geographic area may be found in Note 13 of the
Notes to the Consolidated Statements on Page AR 20.
(C) 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 Note 15 of the Notes to Consolidated
Financial Statements on Page AR 20.
Selected Quarterly Financial Data:
For the years ended September 27, 1997, and September 28, 1996.
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
FISCAL 1997 DECEMBER 28, 1996 MARCH 29, 1997 JUNE 28, 1997 SEPTEMBER 27, 1997
- ------------------------------------------------ ----------------- -------------- ------------- ------------------
<S> <C> <C> <C> <C>
Net sales....................................... $ 3,058,114 $ 4,054,348 $ 2,027,070 $ 3,119,106
Gross profit.................................... 1,853,362 2,664,537 803,410 1,783,666
Net income (loss)............................... 35,951 121,924 (998,674) (402,702)
Net income (loss) per share..................... $ .03 $ .09 $ (.78) $ (.32)
</TABLE>
<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>
7
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and the results
of operations should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto appearing elsewhere
herein.
Certain Factors Affecting Future Operating Results
The discussions in this Form 10-K, including any discussion of or
impact, expressed or implied, on the Company's 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 results indicated by such forward-looking
statements. The Company's operating results may be affected by many factors,
including but 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 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. These and
other risks are detailed from time to time in the Company's filings with the
Securities & Exchange Commission, including this Form 10-K, for the fiscal
year ended September 27, 1997.
On December 12, 1997, the Board of Directors announced that it has
undertaken an internal review of certain of its historical service contracts. On
January 13, 1998 the Company announced that the results from its internal review
concluded that certain of the Company's internal approval and control procedures
were not followed in connection with such contracts. However, the Company does
not believe that this will result in a material liability or asset impairment to
the Company or otherwise have any material effect on the financial position or
results of operations of the Company.
The Company utilizes software and related technologies that will be
affected by the date change in the year 2000. Internal efforts are currently
under way to determine the full scope and related costs to insure that the
Company's systems and products continue to meet its internal needs and those
of its customers. The Company has incurred, and will continue to incur,
expenses through the year 1999 to resolve this issue. These expenses are not
expected to be material.
Results of Operations
FISCAL 1997 COMPARED TO FISCAL 1996
Consolidated net sales for the year ended September 27, 1997, were
$12,258,638 compared with sales of $14,012,802 for the prior fiscal year.
This decrease of $1,754,164, or 13%, is attributed to declining sales of
certain Datotek products acquired during fiscal 1995 which are reaching the
end of their product life cycle, and the failure to receive certain customer
orders in time to ship before year-end. Other products helped to offset some
of the revenue decline in Datotek products.
Domestic and foreign sales declined by $898,735 and $855,429 in
fiscal 1997, or 25% and 8%, respectively. The decline in domestic sales is
predominantly due to procurement reductions by U.S. Government agencies. This
is not expected to be a trend that will continue into the current fiscal
year. The decline in Datotek product sales combined with the late or
non-receipt of customer orders that could not be shipped before year-end
contributed to the decrease in foreign sales.
Gross profit for fiscal year 1997 was $7,104,975 compared to
$8,231,388 in fiscal 1996. The 14% decrease in gross profit is primarily the
result of the decline in revenue. Gross profit expressed as a percentage of
sales was 58% in fiscal 1997 compared to 59% in the prior year. Higher
margins tend to be associated with higher sales because not all manufacturing
costs are truly variable.
Engineering, design and product development costs in fiscal 1997 were
$2,378,564, compared to $1,955,852 in fiscal 1996. The $422,712, or 22%
increase represents an investment in high-speed communications security
systems that are intended to enable the Company to compete for emerging
opportunities in the corporate enterprise and business-to-business electronic
commerce security markets during fiscal 1998 and future years.
8
<PAGE>
Selling, general and administrative expenses increased by $699,555
from $5,582,553 in fiscal 1996 to $6,282,108 for the year just ended. The
increase is predominantly the result of higher selling and business
development charges as the Company increased its staff in those areas and
entered into service support agreements with overseas representatives.
Management believes this investment in infrastructure is important to the
growth of the Company.
Investment income earned during fiscal 1997 was $128,722 compared to
$239,142 in fiscal 1996. The decrease of $110,420 was predominantly the
result of the Company's lower average cash balances during the current year
caused by the payment of the Datotek acquisition and ESOP loans. Interest
expense also declined by $179,493 from $243,472 in fiscal 1996 to $63,979 for
the year just ended, again as a result of the payment of these loans. The
$167,047 in other expense incurred during fiscal 1997 was primarily the
result of the Company's disposal loss associated with certain capital
equipment.
The Company incurred a net loss of $1,243,501, or $.98 per share
during fiscal 1997 compared to net earnings of $532,147, or $.42 per share in
the prior year. The loss in the current year was a direct consequence of
lower sales coupled with a higher investment in new product and a substantial
increase in selling and business development expenses.
The effects of inflation and changing costs have not had a
significant impact on sales or earnings in recent years. As of December 1,
1997, none of the Company's monetary assets or liabilities were subject to
foreign exchange risks. When necessary, the Company hedges foreign currency
transactions against exchange rate changes to minimize financial risk. The
Company also attempts to minimize the financial risks normally associated
with foreign sales by either utilizing letters of credit confirmed by U.S.
banks or through the use of export insurance. The Company usually includes an
inflation factor into pricing when negotiating multi-year contracts with
customers.
FISCAL 1996 COMPARED TO FISCAL 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%, was 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 was 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, and were
not expected to recur in future years.
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 costs 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 as management prepared the Company
for future growth in sales.
Investment income earned during fiscal year 1996 was $239,142,
compared to $271,815 in fiscal year 1995. The decrease of $32,673 was 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.
9
<PAGE>
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 represented 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.
FISCAL 1995 COMPARED TO FISCAL 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 by 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 was expected to be
non-recurring.
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 cost 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 was
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 represented a decrease in net earnings of approximately 24%.
This decrease was the direct result of additional costs incurred in
connection with the Datotek acquisition.
Liquidity and Capital Resources
Cash and cash equivalents decreased from $6,381,026 at September 28,
1996 to $1,876,748 at September 27, 1997. This decrease was primarily due to
the fiscal 1997 loss of $1,243,501, the payment of the Datotek acquisition
and ESOP loans of $1,650,000 and $695,175, respectively, and a $808,207
increase in inventory as the Company prepared for fiscal 1998 shipments. The
current ratio of the Company increased from 2.9 to 1 as of September 28, 1996
to 3.2 to 1 as of September 27, 1997. The increase was primarily caused by
the payoff of the Datotek and ESOP loans.
The Company's short-term capital requirements are funded primarily
from cash from operations and borrowings under the Company's bank credit
line. Long-term capital requirements have historically been funded from the
Company's operations. Effective May 1, 1997, the Company and its bank renewed
its existing Revolving Line of Credit Agreement. The $3,500,000 line of
credit is available until May 1, 1998. Borrowings under the Agreement 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
10
<PAGE>
Company's assets and is used for working capital requirements and to support
letters of credit. During June 1997, the Company borrowed $500,000 against
this credit line, subsequently paying the amount back in full during August
1997 upon receipt of certain large trade receivables. Although there are
currently no borrowings against the line of credit, availability under the
line as of September 27, 1997, has been reduced by $839,158 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 acted
as a guarantor on these loans and, as a result, 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.
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 bears interest at 9% per annum, requires 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 bears
interest at 13.6% per annum and requires equal monthly principal payments of
$9,838 beginning on September 28, 1997. At its August 27, 1997 meeting, the
Board of Directors voted to terminate the Employee Stock Ownership Plan
effective October 1, 1997. Effective with the Plan's termination, the Company
loans and the remaining balance in ESOP Deferred Compensation within
Stockholders' Equity were eliminated and the unallocated ESOP shares were
transferred to Treasury Stock and Additional Paid-in-Capital. Vested shares
of participants are in the process of being distributed.
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 of the Notes to Consolidated Financial Statements
on Page AR 20). 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, 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%, were paid in full during November 1996.
Management anticipates no unusual capital expenditures during fiscal
1998. However, as a result of the Company's significant sales order backlog
and expected growth in revenue during fiscal 1998, management anticipates the
Company will need to increase its line of credit to accommodate letters of
credit and working capital requirements until orders can be shipped and
customer accounts collected. In particular, one sales order currently in
production for approximately $7.4 million, is expected to ship at the end of
the third quarter of fiscal 1998. The Company is currently negotiating for an
increase in the line of credit with its bank. No assurances can be given that
such an increased line of credit will be available on satisfactory terms, if
at all. If the Company is unable to obtain an increase or renewal of its
existing line of credit, its operations could be substantially adversely
affected.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index to the Financial Statements and Schedules on Page 20
hereof.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
11
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
(a) Identification of Directors
The following table sets forth the year each director first became a
director, the position currently held by each director with the Company, their
principal occupation during the past five years, any other directorships held by
such person in any company subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended, or in any company registered as an
investment company under the Investment Company Act of 1940, as amended, and
their age.
<TABLE>
<CAPTION>
NAME AND YEAR POSITIONS AND OFFICES
FIRST BECAME A DIRECTOR WITH THE COMPANY AGE
-------------------------- ---------------------- --------
<S> <C> <C>
Roland S. Gerard (1) President, CEO,
1997 Director 47
Carl H. Guild, Jr. (2) Director 54
1997
Herbert A. Lerner (3) Chief Financial Officer,
1961 Treasurer, Director 70
Robert T. Lessard (4) Director 57
1997
Arnold M. McCalmont (5) Chairman of the Board of
1961 Directors 68
James A. McCalmont (6) Former Director 42
1991
Philip A. Phalon (7) Director 68
1993
</TABLE>
- ------------------------
(1) Mr. Gerard has been employed by the Company since June 1995. From January
1994 until April 1995 he was Corporate Vice President of SFA, Inc., a
privately owned manufacturer of data communications equipment. From January
1992 until January 1994 he was President of SFA Datacom, Inc., a subsidiary
of SFA, Inc. From January 1988 to January 1992 he was a Group Vice President
of Plantronics, Inc. and President of Plantronics Futurecomms, Inc. and
Frederick Electronics Corp., both subsidiaries of Plantronics, Inc., a
privately owned company.
(2) Mr. Guild was elected to the Board in May 1997. From 1993 to 1997, he was a
Senior Vice President with Raytheon Engineers and Constructors, Inc., a unit
of Raytheon Company. Mr. Guild is currently an independent consultant.
(3) Herbert A. Lerner has been a director of the Company since 1961, and
employed as Treasurer since 1961, with the exception of 1987. From 1990
until June 1, 1992, he was a Programs Business Manager with Raytheon
Company. Mr. Lerner became the Company's Chief Financial Officer effective
January 14, 1998. In addition to his duties at the Company, Mr. Lerner is
currently an independent consultant.
12
<PAGE>
(4) Mr. Lessard was employed in a variety of management positions from 1966
through December 1995 at the U.S. National Security Agency ("NSA"),
Department of Defense. During his final two years at NSA, Mr. Lessard was
the Group Chief in the Operations Directorate responsible for communications
and cryptographic technology. Since his retirement in December 1995, he has
represented the Director of the National Security Agency on several special
projects.
(5) Arnold M. McCalmont has been a director and Chairman of the Board of the
Company since 1961, and was President of the Company from 1961 through
August 22, 1993. Mr. McCalmont is currently a part-time employee of the
Company. Mr. McCalmont has announced his intention to not seek reelection to
the Board at the Company's next annual meeting of its shareholders.
(6) James A. McCalmont was Director of Marketing of the Company from October 24,
1988 through April 29, 1991, and was an employee of the Company since 1975.
Mr. McCalmont resigned from the Board of Directors and terminated his
employment with the Company effective January 9, 1998.
(7) Philip A. Phalon was Senior Vice-President for Corporate Marketing for
Raytheon Company from 1983 through September 1990. From June 1994 through
September 1995, Mr. Phalon was the Company's Acting President. He is
currently an independent consultant.
(b) Identification of Executive Officers
The following table sets forth the names of all executive officers of the
Company, excluding those who are also directors, the year each first became an
executive officer, the position currently held by each officer of the Company,
the principal occupation of each officer during the past five years, and the age
of each officer.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NOMINEE'S NAME AND YEAR WITH
FIRST BECAME AN OFFICER THE COMPANY AGE
- ------------------------ ------------------------- ---
<S> <C> <C>
John I. Gill (1) Executive Vice President
1985 58
Graham R. Briggs (2) Former Vice-President
1992 Finance 58
</TABLE>
- ------------------------
(1) Mr. Gill has been employed by the Company since August 1983.
(2) Mr. Briggs was employed by the Company from January 1992 until his
termination on January 14, 1998.
(c) FAMILY RELATIONSHIPS
With the exception of Arnold M. McCalmont and James A. McCalmont, no
director or executive officer is related to any other director or executive
officer by blood or marriage.
(d) SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who beneficially own more than
ten percent (10%) of the Company's stock, to file initial reports of ownership
on Form 3 and reports of changes in ownership on Form 4, and annual statements
of beneficial ownership on Form 5 with the SEC and any national securities
exchange on
13
<PAGE>
which the Company's securities are registered. Executive officers, directors
and greater than ten percent (10%) beneficial owners are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on a review of the copies of such forms furnished to the
Company and written representations from the executive officers and directors
that no other reports were required, the Company believes that during Fiscal
1997, its executive officers, directors and greater than ten percent (10%)
beneficial owners complied with all applicable Section 16(a) filings.
ITEM 11. EXECUTIVE COMPENSATION
(a) Summary Compensation Table
The following tables set forth certain summary information concerning
compensation paid or accrued by the Company during the past three fiscal
years to its Chief Executive Officer and the other executive officers of the
Company whose annual compensation during Fiscal Year 1997 exceeded $100,000
(hereafter referred to as the "named executive officers"):
<TABLE>
<CAPTION>
FISCAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- ------------------------------------------------------------------- ----------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Graham R. Briggs 1997 $ 96,324 $ 11,171(1) $ --
Former Vice President Finance 1996 $ 85,865 $ 1,500(1) $ 1,747(2)
1995 $ 87,233 $ 200(1) $ 1,366(2)
Roland S. Gerard (3) 1997 $ 158,708 $ 45,171(4) $ 1,173(5)
President and Chief 1996 $ 125,862 $ 15,000(4) $ 4,233(6)
Executive Officer 1995 $ 35,600 $ -- $ 25,644(7)
John I. Gill 1997 $ 116,325 $ 18,171(8) $ --
Executive Vice President 1996 $ 108,953 $ 1,500(8) $ 2,209(2)
1995 $ 111,660 $ 200(8) $ 1,948(2)
</TABLE>
- ------------------------
(1) These amounts of $11,171, $1,500, and $200 were paid to Mr. Briggs for
services rendered in fiscal years 1996, 1995, and 1994, respectively.
(2) Represents the Company's contribution for the account of the respective
executive officer under the Company's Profit-Sharing Plan, a plan qualified
under Section 401(k) of the Internal Revenue Code of 1986, as amended (the
"Code"). The contribution is determined by the Board of Directors in its
sole discretion, but may not exceed 15% of the Company's net profits before
taxes for any given Plan year, nor certain limits imposed by the Internal
Revenue Code.
(3) Mr. Gerard has been employed by Company as President since June 12, 1995.
(4) These amounts of $45,171, and $15,000 were paid to Mr. Gerard for services
rendered in fiscal years 1996 and 1995, respectively.
(5) Represents the personal use portion of Mr. Gerard's automobile allowance.
14
<PAGE>
(6) Represents the Company's $3,625 contribution to Mr. Gerard under the
Company's Profit-Sharing Plan as described in note (2) above, plus $608 for
the personal use portion of Mr. Gerard's automobile allowance.
(7) Consists entirely of relocation expenses.
(8) These amounts of $18,171, $1,500, and $200 were paid to Mr. Gill for
services rendered in fiscal years 1996, 1995, and 1994, respectively.
(b) Stock Options
No stock options were granted to the named executive officers. The
unexercised options held as of September 27, 1997 by the named executive
officers are as follows:
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END (1)
---------------------------- ------------------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE NOT EXERCISABLE EXERCISABLE NOT EXERCISABLE
- ------------------------------------------------------- ----------- --------------- --------------- -------------------
Roland S. Gerard....................................... 40,000(2) 60,000 -- --
Graham R. Briggs....................................... 6,800(3) -- -- --
</TABLE>
- ------------------------
(1) Value is based on the difference between the option exercise price and the
fair market value at December 12, 1997 ($7.00 per share) multiplied by the
number of shares underlying the in-the-money portion of the option.
(2) This represents a grant of an option to buy 100,000 shares of Common Stock
under the Technical Communications Corporation 1991 Stock Option Plan, which
is exercisable as follow: (i) 20% on 5/25/96 at an exercise price of $7.50
per share (the fair market value on the date of grant), (ii) an additional
20% on 5/25/97 at an exercise price of $8.25 per share, (iii) an additional
20% on 5/25/98 at an exercise price of $9.08 per share, (iv) and additional
20% on 5/25/99 at an exercise price of $9.98 per share, and (v) an
additional 20% on 5/25/2000 at an exercise price of $10.98 per share.
(3) This represents the unexercised remainder of a non-qualified option to
purchase 10,000 shares of Common Stock under the Technical Communications
Corporation 1991 Stock Option Plan granted on 2/28/92, which is exercisable
at an option price of $12.75 per share as follows: (i) 10% on 2/27/93, (ii)
an additional 10% on 2/27/94, (iii) an additional 20% on 2/27/95, (iv) an
additional 35% on 2/27/96, and (v) an additional 25% on 8/27/96. As a result
of Mr. Brigg's termination effective January 14, 1998, these remaining
options to purchase shares will expire on February 13, 1998, unless
exercised.
(c) Compensation of Directors
Directors who are not regular employees of the Company received a fee of
$1,000 for attendance at the November 1996 Board of Directors meeting, and
$1,200 for all meetings attended thereafter during Fiscal Year 1997. In
addition, beginning with its next Annual Meeting, each outside director is
authorized an annual retainer of $2,800 paid in arrears in quarterly increments
of $700 starting February 1, 1997. During Fiscal Year 1997, outside directors
also received a fee of $500 for each meeting of a committee of the Board of
Directors they attended. Mr. Lerner, who is an employee, was also authorized to
receive the retainer and fees for attendance at meetings.
15
<PAGE>
In addition, pursuant to the 1990 Non-Employee Director Stock Option Plan,
adopted by the Board of Directors in August 1990 and approved by the
stockholders at the 1991 Annual Meeting, each director who was not then an
employee, who attended at least 75% of Board Meetings held during the previous
fiscal year, and who was not otherwise ineligible, received on the date of each
Annual Meeting of Stockholders during the term of said plan an option to
purchase 750 shares of Common Stock at an exercise price of one hundred percent
(100%) of the fair market value of the Common Stock on the date the option was
granted. Each option had a term of five (5) years from the date of grant and was
exercisable in full or in part at any time or times after the date of grant
until the earlier of the expiration of such term or sixty days after the
optionee ceased to serve as a director of the Company. Mr. Phalon, the then
currently eligible director under the 1990 Non-Employee Director Stock Option
Plan, received an option to purchase 750 shares following the 1997 Annual
Meeting. The 1990 Non-Employee Director Stock Option Plan was subsequently
terminated by the Board in February 1997.
In February 1997, the Board approved additional director compensation that
will grant 1,000 share stock options under the Company's 1991 Stock Option Plan
to all directors effective on the date of the 1998 Annual Meeting of the Board
of Directors. These shares will have a term of five (5) years from the date of
the grant and will have an exercise price equal to 85% of the fair market value
as of that date. In addition, all directors are to receive a grant of 500 shares
of Company stock at the 1998 Annual Meeting of the Board of Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table shows, as of December 12, 1997, the ownership of common
stock of the Company by any person or group who is known to the Company to be
the beneficial owner of more than 5% of the Company's common stock outstanding
and entitled to vote as of such date:
<TABLE>
<CAPTION>
NATURE OF
AMOUNT AND
BENEFICIAL OWNERSHIP
(NUMBER OF SHARES) PERCENT OF
NAME AND ADDRESS (1) CLASS (1)
- ----------------------------------------------------------- --------------------- -------------
<S> <C> <C>
Herbert A. Lerner and James A. McCalmont, Trustees,
Technical Communications Corporation Employees' Stock
Ownership Trust
100 Domino Drive
Concord, MA 01742-2892 111,748(2) 9.0% (2)
Martindale Andres & Company, Inc.
200 Four Falls Corporate Center
Suite 200 West Conshohocken, PA 19428 74,060(3) 5.9% (3)
Quest Advisory Corporation
c/o Charles M. Royce
1414 Avenue of the Americas
New York, NY 10019 127,200(4) 10.2% (4)
</TABLE>
- ------------------------
(1) Unless otherwise indicated, each of the persons named in the table has sole
voting and investment power with respect to the shares set forth opposite
such person's name.
16
<PAGE>
Information with respect to beneficial ownership is
based upon information furnished by each stockholder.
(2) Held as Trustees for the ESOP and represents shares that are allocated to
the participants. Until vested shares of the terminated plan are
distributed, each participant may direct the Trustees as to the manner in
which shares allocated to his or her account shall be voted. The ESOP
provides that the Trustees shall vote any shares allocated to participants'
accounts as to which they have not received voting instructions in the same
proportion as shares in participants' accounts as to which voting
instructions are received. Messrs. Lerner and McCalmont disclaim beneficial
ownership of these 111,748 shares, except that James A. McCalmont does not
disclaim beneficial ownership of 6,714 shares allocated to James A.
McCalmont under the ESOP.
(3) The nature of ownership of Martindale Andres & Company ("Martindale") as set
forth herein is based upon their Schedule 13G on file with the Securities
and Exchange Commission ("SEC"). Martindale in its capacity as investment
advisor may be deemed the beneficial owner of the 74,060 shares indicated in
the above table, which shares are owned by numerous clients of Martindale.
(4) The nature of ownership of Quest Advisory Corporation ("Quest") as set forth
herein is based upon their Schedule 13G on file with the SEC. Quest in its
capacity as investment advisor may be deemed the beneficial owner of the
127,200 shares indicated in the above table, which shares are owned by
numerous clients of Quest. Mr. Royce disclaims beneficial ownership of the
127,200 shares owned by Quest.
(b) SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the number of shares and percentage of common
stock of the Company outstanding and entitled to vote beneficially owned by each
director and named executive officer as well as all directors and officers as a
group as of December 12, 1997:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
POSITIONS AND OF BENEFICIAL
NAME OF OFFICES WITH OWNERSHIP PERCENT OF
DIRECTOR OR OFFICER THE COMPANY (# OF SHARES) (1) CLASS (1)
- ------------------------------------------------------------- ------------------ ------------------- -------------
<S> <C> <C> <C>
Graham R. Briggs (2) Vice-President
Finance 12,260(3) 1.0%
Roland S. Gerard President, CEO,
Director 46,948(4) 3.8%
John I. Gill Executive Vice
President 19,550(5) 1.6%
Carl H. Guild, Jr. Director 0 0%
Herbert A. Lerner (2) Treasurer, Director 3,486(6) 0.3%
Robert T. Lessard Director 0 0%
Arnold M. McCalmont Chairman of the
Board of Directors 11,007(7) 0.9%
</TABLE>
17
<PAGE>
<TABLE>
<S> <C> <C> <C>
James A. McCalmont (2) Director 22,214(8) 1.8%
Philip A. Phalon Director 1,750(9) 0.1%
All directors and officers as a group 117,215 9.4%
</TABLE>
- ------------------------
(1) Unless otherwise indicated, each of the persons named in the table has sole
voting and investment powers with respect to the shares set forth opposite
such person's name. With respect to each person or group, percentages are
calculated based on the number of shares outstanding plus shares that such
person or group may acquire within sixty (60) days upon the exercise of
stock options.
(2) Mr. Briggs was terminated on January 14, 1998. Mr. Lerner became the
Company's Chief Financial Officer on that same date. Mr. James McCalmont
resigned as a Director of the Company on January 9, 1998.
(3) Includes 4,763 shares allocated to Mr. Briggs under the ESOP and 6,800
shares that may be acquired by Mr. Briggs if exercised by February 13, 1998.
(4) Includes 40,000 shares that may be acquired by Mr. Gerard within sixty (60)
days upon exercise of stock options, and 1,948 shares acquired through the
Company's ESOP.
(5) Includes 9,550 shares currently allocated to Mr. Gill under the ESOP.
(6) Includes 3,300 shares that may be acquired by Mr. Lerner within sixty (60)
days upon exercise of stock options. Excludes 111,748 shares held by the
ESOP, which Mr. Lerner, as a trustee of the ESOP, may be deemed to own
beneficially. Mr. Lerner disclaims beneficial ownership of these shares.
With respect to shares now owned by him, Mr. Lerner shares the voting and
investment powers with his wife.
(7) The 11,007 shares are allocated to Arnold M. McCalmont under the Company's
ESOP.
(8) Includes 15,500 shares owned by James A. McCalmont and 6,714 shares
allocated to him under the ESOP for which he does not disclaim beneficial
ownership. Excludes 1,300 shares owned by James A. McCalmont's wife and 200
shares belonging to his children, as to all of which Mr. McCalmont disclaims
any beneficial ownership. Also excludes 105,034 shares held by James A.
McCalmont as a Trustee of the ESOP, all of which Mr. McCalmont disclaims any
beneficial ownership.
(9) Includes 1,750 shares that may be acquired by Mr. Phalon within sixty (60)
days upon exercise of stock options.
18
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Herbert A. Lerner, Company Director Chief Financial Officer, and
Treasurer, and James A. McCalmont, Director, are Trustees of the Technical
Communications Corporation Employees' Stock Ownership Trust. At its August
27, 1997 meeting, the Board of Directors voted to terminate the Employee
Stock Ownership Plan effective October 1, 1997.
Edward E. Hicks, Esq., the Company's Secretary and Clerk, is a member
of a law firm that provides legal services to the Company.
Lawrence A. Kletter, Esq., who resigned as a director during fiscal
year 1997, is a member of a law firm that provided legal services to the
Company.
Carl H. Guild, Jr., elected to the Board of Directors effective May
1, 1997, serves as a consultant for the Company, earning $52,500 in this
capacity during fiscal 1997.
During fiscal years 1997 and 1996, the Company incurred expenses of
$116,038 and $96,360, respectively, to FutureComms, Inc., a privately held
telecommunications software consulting services company. FutureComms is owned
and operated by Michelle D. Gerard, the wife of the Company's President and
CEO. FutureComms' work ended on August 29, 1997.
During 1996 and 1995, the Company leased a sales office from its
Chairman; lease payments were $1.00 in each year. The fair market value of
such rent was estimated to be below $5,000 per year.
On June 27, 1995, the Company invested $250,800 for a minority
interest in Series B Preferred Stock of Net2Net Corporation, a privately held
company that develops high performance management and analysis systems for
Asynchronous Transfer Mode (ATM) networks. The Company also paid a deposit
for inventory, purchased at a discounted price, valued at $244,200 as well as
entered into an eighteen month distribution agreement with Net2Net that gave
the Company the exclusive right to sell Net2Net products to certain U.S.
Government departments. As of September 27, 1997, $144,283 of the inventory
had been sold and the remaining amount of $99,917 has been either
written-down or fully reserved. Net2Net's president is Stephen McCalmont, son
of Arnold McCalmont, and brother to James McCalmont. Arnold and James
McCalmont, as well as Herbert Lerner, are also investors in Net2Net
Corporation. This investment, which represents less than a 5% interest, has
been accounted for using the cost method.
19
<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.
<TABLE>
<CAPTION>
PAGE NO. IN
ANNUAL REPORT
("AR") OR
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES FORM 10-K
- ----------- ------------------------------------------------------------------------------------ -------------
<S> <C> <C>
(a)1 Consolidated Balance Sheets: AR 7
September 27, 1997 and September 28, 1996
Consolidated Statements of Operations: Years Ended September 27, 1997, September 28, AR 8
1996 and September 30, 1995
Consolidated Statements of Cash Flows: Years Ended September 27, 1997, September 28, AR 9
1996 and September 30, 1995
Consolidated Statements of Stockholders' Equity: Years Ended September 27, 1997, AR 10
September 28, 1996 and September 30, 1995
Notes to Consolidated Financial Statements AR 11
Report of Independent Public Accountants AR 23
(a)2 Financial Statement Schedules
Report of Independent Public Accountants on Supplemental
Schedules to the 22
Consolidated Financial Statements and Schedule II-Valuation and Qualifying Accounts
(a)3 List of Exhibits
3.3(a) Articles of Organization of the Company
3.3(b) By-laws of the Company
3.22(b) 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.
</TABLE>
20
<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
January 27, 1998
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
January 27, 1998
/s/ Carl H. Guild, Jr.
-------------------------------
Carl H. Guild, Jr.
Director
January 27, 1998
/s/ Robert T. Lessard
-------------------------------
Robert T. Lessard
Director
January 27, 1998
-------------------------------
Philip A. Phalon
Director
January 27, 1998
/s/ Herbert A. Lerner
-------------------------------
Herbert A. Lerner
Chief Financial Officer
Treasurer
Director
January 27, 1998
21
<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 1997 annual report to shareholders incorporated
by reference in the Form 10-K, and have issued our report thereon dated
October 29, 1997 (except with respect to the matter discussed in Note 12, as
to which the date is January 15, 1998). 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.
/s/ Arthur Andersen
Boston, Massachusetts
October 29, 1997
- -------------------------------------------------------------------------------
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 27, 1997......................................... $ 53,707 $ -- $ 28,707 $ 25,000
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
</TABLE>
22
<PAGE>
EXHIBIT 13
CONSOLIDATED BALANCE SHEETS:
September 27, 1997, and September 28, 1996.
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................................................... $ 1,876,748 $ 6,381,026
Accounts receivable - trade, less allowance for doubtful accounts of $25,000 in
1997 and $53,707 in 1996..................................................... 3,259,549 3,219,124
Unbilled revenue............................................................... 198,038 --
Inventories (Note 4)........................................................... 3,423,979 2,615,772
Refundable income taxes (Note 6)............................................... 609,812 --
Other current assets........................................................... 117,947 199,122
------------- -------------
Total current assets......................................................... 9,486,073 12,415,044
------------- -------------
Equipment and leasehold improvements (Note 16)................................... 4,382,655 4,223,816
Less accumulated depreciation and amortization................................. 3,200,075 2,646,683
------------- -------------
Equipment and leasehold improvements--net.................................... 1,182,580 1,577,133
------------- -------------
Goodwill......................................................................... 1,614,131 1,614,131
Less accumulated amortization.................................................. 501,533 286,623
------------- -------------
Goodwill--net................................................................ 1,112,598 1,327,508
------------- -------------
Deferred income taxes (Note 6)................................................... 76,553 221,640
Other assets..................................................................... 598,449 458,708
------------- -------------
$ 12,456,253 $ 16,000,033
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................................... $ 861,633 $ 504,860
Long-term debt--current portion (Note 5)....................................... -- 1,145,175
Accrued liabilities:
Compensation and related expenses............................................ 290,093 597,938
Other (Note 3)............................................................... 1,794,481 2,019,303
------------- -------------
Total current liabilities.................................................... 2,946,207 4,267,276
------------- -------------
Long-term debt (Note 5).......................................................... -- 1,200,000
Commitments and contingencies (Notes 10, 12, 14 and 16)
Stockholders' Equity
Common stock--par value $.10 per share; authorized 3,500,000 shares, issued
1,273,703 shares in 1997 and 1,264,496 in 1996............................... 127,370 126,450
Additional paid-in capital..................................................... 1,526,110 1,473,643
ESOP deferred compensation (Note 5)............................................ (527,772) (695,175)
Retained earnings.............................................................. 8,464,338 9,707,839
Less treasury stock at cost, 10,000 shares................................... (80,000) (80,000)
------------- -------------
Total stockholders' equity................................................... 9,510,046 10,532,757
------------- -------------
$ 12,456,253 $ 16,000,033
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page AR-7
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS:
Years Ended September 27, 1997, September 28, 1996, and September 30, 1995.
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net sales........................................................... $ 12,258,638 $ 14,012,802 $ 10,227,565
Cost of sales....................................................... 5,153,663 5,781,414 4,875,683
------------- ------------- -------------
Gross profit.................................................... 7,104,975 8,231,388 5,351,882
------------- ------------- -------------
Operating expenses:
Selling, general and administrative expenses...................... 6,282,108 5,582,553 3,826,778
Product development costs......................................... 2,378,564 1,955,852 1,492,370
------------- ------------- -------------
Total operating expenses........................................ 8,660,672 7,538,405 5,319,148
------------- ------------- -------------
Operating profit (loss)......................................... (1,555,697) 692,983 32,734
Other income (expense):
Investment income................................................. 128,722 239,142 271,815
Interest expense.................................................. (63,979) (243,472) (158,570)
Other............................................................. (167,047) 20,876 (27,652)
------------- ------------- -------------
Total other income (expense).................................... (102,304) 16,546 85,593
------------- ------------- -------------
Income (loss) before income taxes................................... (1,658,001) 709,529 118,327
Provision (benefit) for income taxes (Note 6)....................... (414,500) 177,382 29,582
------------- ------------- -------------
Net income (loss)................................................... $ (1,243,501) $ 532,147 $ 88,745
------------- ------------- -------------
------------- ------------- -------------
Net income (loss) per common share (Note 2)......................... $ (0.98) $ 0.42 $ 0.07
Weighted average common shares outstanding.......................... 1,270,625 1,257,384 1,252,567
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page AR-8
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS:
Years Ended September 27, 1997, September 28, 1996, and September 30, 1995.
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ -----------
<S> <C> <C> <C>
Operating Activities:
Net Income (loss)...................................................... $ (1,243,501) $ 532,147 $ 88,745
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities:
Depreciation and amortization........................................ 911,331 882,905 500,850
Net loss on disposal of fixed assets................................. 192,425 -- --
Non-cash compensation associated with ESOP........................... 167,403 246,136 246,136
Changes in assets and liabilities, net of the acquisition of Datotek:
Decrease (increase) in accounts receivable........................... (40,425) 1,792,842 (992,005)
(Increase) in unbilled revenue....................................... (198,038) -- --
Decrease (increase) in inventories................................... (808,207) (187,944) 136,602
Decrease (increase) in refundable income taxes....................... (609,812) 139,944 (55,604)
Decrease (increase) in other current assets.......................... 81,175 143,634 (253,904)
Decrease (increase) in other assets and deferred income taxes........ 5,346 (277,780) (256,216)
Increase (decrease) in accounts payable and other accrued
liabilities........................................................ (175,894) 483,728 187,235
------------- ------------ -----------
Net cash provided (used) by operating activities..................... (1,718,197) 3,755,612 (398,161)
------------- ------------ -----------
Investing Activities:
Additions to equipment and leasehold improvements.................... (533,177) (597,452) (366,300)
Proceeds from disposal of equipment.................................. 38,884 -- --
Cash paid for Datotek acquisition.................................... -- (44,511) (3,687,000)
------------- ------------ -----------
Net cash provided (used) by investing activities....................... (494,293) (641,963) (4,053,300)
------------- ------------ -----------
Financing Activities:
Proceeds from exercise of stock options.............................. 53,387 85,723 14,500
Proceeds from bank loan.............................................. -- -- 2,250,000
Borrowings under line of credit...................................... 500,000 -- --
Payment of line of credit............................................ (500,000) -- --
Payment of debt...................................................... (2,345,175) (696,136) (396,136)
------------- ------------ -----------
Net cash provided (used) by financing activities..................... (2,291,788) (610,413) 1,868,364
------------- ------------ -----------
Net increase (decrease) in cash and cash equivalents................. (4,504,278) 2,503,236 (2,583,097)
Cash and cash equivalents at beginning of year......................... 6,381,026 3,877,790 6,460,887
------------- ------------ -----------
Cash and cash equivalents at end of year............................... $ 1,876,748 $ 6,381,026 $ 3,877,790
------------- ------------ -----------
------------- ------------ -----------
Supplemental disclosures:
Interest paid........................................................ $ 70,991 $ 243,472 $ 158,570
Income taxes paid (net of refunds received).......................... 408,193 103,497 (24,401)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page AR-9
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY:
Years Ended September 27, 1997, September 28, 1996, and September 30, 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------- -----------
<S> <C> <C> <C>
Shares of Common Stock:
Beginning balance.................................................... 1,264,496 1,254,426 1,251,176
Exercise of stock options............................................ 9,207 10,070 3,250
----------- ------------- -----------
Ending balance..................................................... 1,273,703 1,264,496 1,254,426
----------- ------------- -----------
----------- ------------- -----------
Common Stock at par value:
Beginning balance.................................................... $ 126,450 $ 125,443 $ 125,118
Exercise of stock options............................................ 920 1,007 325
----------- ------------- -----------
Ending balance..................................................... 127,370 126,450 125,443
----------- ------------- -----------
Additional Paid-In Capital
Beginning balance.................................................... 1,473,643 1,388,927 1,374,752
Exercise of stock options............................................ 52,467 84,716 14,175
----------- ------------- -----------
Ending balance..................................................... 1,526,110 1,473,643 1,388,927
----------- ------------- -----------
ESOP Deferred Compensation:
Beginning balance.................................................... (695,175) (941,311) (1,187,447)
Principal payments on ESOP debt (Note 5)............................. 167,403 246,136 246,136
----------- ------------- -----------
Ending balance..................................................... (527,772) (695,175) (941,311)
----------- ------------- -----------
Retained Earnings:
Beginning balance.................................................... 9,707,839 9,175,692 9,086,947
Net income (loss).................................................... (1,243,501) 532,147 88,745
----------- ------------- -----------
Ending balance..................................................... 8,464,338 9,707,839 9,175,692
----------- ------------- -----------
Treasury Stock:
Beginning balance (10,000 shares).................................... (80,000) (80,000) (80,000)
----------- ------------- -----------
Ending balance....................................................... (80,000) (80,000) (80,000)
----------- ------------- -----------
Total stockholders' equity............................................. $ 9,510,046 $ 10,532,757 $ 9,668,751
----------- ------------- -----------
----------- ------------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page AR-10
<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, marketing, 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.
Page AR-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CAPITALIZED SOFTWARE COSTS
Certain computer software costs are capitalized in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," and
are reported at the lower of unamortized cost or net realizable value. Upon
initial product release, these costs are amortized based upon the higher of
(a) the ratio of current revenues to total anticipated revenues of the
products, or (b) the straight-line method, over two or three years.
RECOGNITION OF REVENUE
The Company generally recognizes revenue upon shipment of products,
except in the case of long-term contracts for which the revenue is
recognized under the percentage-of-completion method.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations.
INCOME TAXES
The Company records income tax expense in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes," which
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 basis of assets and
liabilities.
WARRANTY COSTS
The Company provides for warranty costs based on a percentage of sales.
The percentage is adjusted periodically in accordance with actual
experience.
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.
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share,"
which establishes standards for computing and presenting earnings per share
for entities with publicly held common stock. SFAS No. 128 is effective for
periods ending after December 15, 1997 and early adoption is not permitted.
Had SFAS No. 128 been adopted as of September 29, 1996, there would have
been no effect on the Company's reported earnings per share for the year
ended September 27, 1997, including all quarterly earnings per share.
Page AR-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1997, 1996, and 1995 ended on September 27, 1997,
September 28, 1996, and September 30, 1995, respectively.
(3) OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 28,
1997 1996
------------- -------------
<S> <C> <C>
Reserve for product warranty........................................................ $ 163,480 $ 386,175
Reserve for product installation.................................................... -- 141,650
Customer advance payments........................................................... 149,011 108,402
Sales representative commissions.................................................... 746,833 340,928
Customer support agreements......................................................... 519,839 344,520
Income taxes payable................................................................ 101,212 463,227
Other............................................................................... 114,106 234,401
------------- -------------
Total accrued liabilities........................................................... $ 1,794,481 $ 2,019,303
------------- -------------
------------- -------------
</TABLE>
(4) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 28,
1997 1996
------------- -------------
<S> <C> <C>
Finished goods...................................................................... $ 64,781 $ 10,557
Work in process..................................................................... 1,220,152 853,422
Raw materials and supplies.......................................................... 2,139,046 1,751,793
------------- -------------
Total inventories................................................................... $ 3,423,979 $ 2,615,772
------------- -------------
------------- -------------
</TABLE>
(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 acted as guarantor on these loans and, as a result, 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.
Page AR-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 bears interest at 9% per annum, requires 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 bears interest at
13.6% per annum and requires equal monthly principal payments of $9,838
beginning on September 28, 1997.
The Company makes contributions to the Trust equal to the monthly
payment of principal and interest on the ESOP loans as they become 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 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
FOR THE FISCAL YEARS ENDED: 1997 1996 1995
- -------------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Compensation........................................................ $ 167,403 $ 246,136 $ 246,136
Interest............................................................ 49,104 71,996 88,305
------------- ------------- -------------
Total contributions................................................. $ 216,507 $ 318,132 $ 334,441
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
At its August 27, 1997 meeting, the Board of Directors voted to
terminate the Employee Stock Ownership Plan effective October 1, 1997.
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, 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%, were paid in full during November 1996.
At September 27, 1997, the Company had a $3,500,000 line of credit at a
rate of prime plus 1/2 of 1%. Availability under the line of credit has been
reduced by $839,158 for outstanding standby letters of credit (see Note 10).
During June 1997, the Company borrowed $500,000 against its credit line,
subsequently paying the amount back in full during August 1997 upon receipt
of certain large trade receivables. Other than outstanding standby letters
of credit, the Company had no borrowing under the line of credit in 1996 or
1995.
The foregoing bank loans and line of credit are secured by a pledge of
substantially all the assets of the Company. This line of credit expires on
May 1, 1998, unless renewed.
Page AR-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES
The provisions (credits) for income taxes consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
FOR THE FISCAL YEARS ENDED: 1997 1996 1995
- -------------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal........................................................... $ (426,692) $ 473,672 $ 21,983
State............................................................. (143,164) 123,027 7,599
------------- ------------- -------------
Total current taxes................................................. (569,856) 596,699 29,582
------------- ------------- -------------
Deferred:
Federal........................................................... 116,149 (336,330) --
State............................................................. 39,207 (82,987) --
------------- ------------- -------------
Total deferred taxes................................................ 155,356 (419,317) --
------------- ------------- -------------
Total provision (benefit)........................................... $ (414,500) $ 177,382 $ 29,582
------------- ------------- -------------
------------- ------------- -------------
</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 27, SEPTEMBER 28, SEPTEMBER 30,
FOR THE FISCAL YEARS ENDED: 1997 1996 1995
- -------------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Tax at U.S. statutory rate.......................................... $ (563,720) $ 241,240 $ 40,231
Benefit of Foreign Sales Corp....................................... -- (23,604) (29,898)
State income taxes, net of Federal benefit.......................... (103,957) 28,260 3,600
Tax-exempt interest................................................. -- (6,875) (7,480)
Accruals and other.................................................. (17,912) 5,861 23,129
Increase (reduction) in valuation allowance......................... 271,089 (67,500) --
------------- ------------- -------------
Total............................................................... $ (414,500) $ 177,382 $ 29,582
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Deferred income taxes consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 28,
1997 1996
------------- -------------
<S> <C> <C>
NOL carryforward.................................................................... $ 263,242 --
Goodwill............................................................................ 88,823 54,874
Inventory reserve................................................................... 154,723 201,140
Warranty reserve.................................................................... 98,237 243,629
Payroll related accruals............................................................ 144,589 37,590
Other............................................................................... (48,141) 38,238
------------- -------------
Total............................................................................... 701,473 575,471
Less: Valuation allowance........................................................... (624,920) (353,831)
------------- -------------
Total............................................................................... $ 76,553 $ 221,640
------------- -------------
------------- -------------
</TABLE>
Page AR-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The valuation allowance relates to uncertainty with respect to 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. All refunds are expected to be received
within the next fiscal year.
(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. At the February 1997 Annual Meeting
of Stockholders, the Company increased the reserve for shares under the SOP
Plan to 350,000. Options under this plan generally expire ten years from the
date of grant and are exercisable in cumulative annual increments commencing
one year after the date of grant.
The Company had previously adopted an Incentive Stock Option Plan (the
ISO Plan) which 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, and are exercisable in cumulative
annual increments commencing one year after the date of grant.
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 at prices not less than the fair market value on
the date of grant. This plan was discontinued in February 1997, but options
are still outstanding and are exercisable at any time after the date of the
grant until expiration, which is five years from the date of grant.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," which sets forth a fair-value based method of
recognizing stock-based compensation expense. As permitted by SFAS No. 123,
the Company has elected to continue to apply Accounting Principles Board
Opinion No. 25 to account for its stock-based compensation plans. Had
compensation for awards in fiscal years 1995 through 1997 under the
Company's stock-based compensation been determined based on the fair value
at the grant dates consistent with the method set forth under SFAS No. 123,
the effect on the Company's net income and earnings per share would have
been as follows:
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
FOR THE FISCAL YEARS ENDED: 1997 1996 1995
- -------------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Net Income (loss)
As reported....................................................... $(1,243,501) $ 532,147 $ 88,745
Pro forma......................................................... $(1,432,295) $ 376,293 $ (24,782)
Earnings per common share
As reported....................................................... $ (0.98) $ 0.42 $ 0.07
Pro forma......................................................... $ (1.23) $ 0.31 $ (0.02)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
AR-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to October 1, 1994, the resulting pro forma
compensation expense may not be representative of the amount to be expensed
in future years. Pro forma compensation expense for options granted is
reflected over the vesting period; future pro forma compensation expense may
be greater as additional options are granted.
The fair value of each option granted was estimated on the grant date
using the Black-Scholes option pricing model with the following weighted
average assumptions: risk-free interest rates of 6.00%, 6.43%, and 6.00% for
1997, 1996, and 1995, respectively, expected life equal to each grant's
vesting period (1 to 9 years), expected volatility of 100%, and an expected
dividend yield of 0%.
A summary of the Company's stock option activity by fiscal year follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------ -----------
<S> <C> <C> <C> <C> <C>
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF
SHARES PRICE SHARES PRICE SHARES
----------- ----------- ----------- ----------- -----------
Options outstanding, beginning of year.................. 233,905 $ 10.13 167,550 $ 10.24 78,950
Options granted
Option price = Fair Market Value...................... 34,700 $ 9.33 46,950 $ 8.71 22,250
Option price > Fair Market Value...................... 16,000 $ 11.45 50,000 $ 11.24 80,000
Options exercised....................................... (7,500) $ 6.90 (10,070) $ 11.26 (3,250)
Options forfeited....................................... (15,950) $ 10.92 (20,525) $ 11.03 (10,400)
----------- ----------- ----------- ----------- -----------
Options outstanding, end of year........................ 261,155 $ 10.14 233,905 $ 10.13 167,550
Options exercisable..................................... 72,965 $ 9.50 51,470 $ 9.78 33,055
Weighted average fair value per share of options granted
during the year....................................... $ 7.76 $ 6.77
AVERAGE
EXERCISE
PRICE
-----------
Options outstanding, beginning of year.................. $ 11.58
Options granted
Option price = Fair Market Value...................... $ 7.45
Option price > Fair Market Value...................... $ 9.68
Options exercised....................................... $ 4.40
Options forfeited....................................... $ 12.54
-----------
Options outstanding, end of year........................ $ 10.24
Options exercisable..................................... $ 10.25
Weighted average fair value per share of options granted
during the year....................................... $ 6.36
</TABLE>
The following summarizes certain data for options outstanding at
September 27, 1997:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
NUMBER OF RANGE OF EXERCISE CONTRACTUAL
SHARES EXERCISE PRICES PRICE LIFE
----------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C>
Options outstanding, end of year 25,850 $ 4.00--$8.00 $ 7.22 7.83
207,195 $ 8.01--$12.00 $ 9.96 8.46
28,110 $ 12.01--$16.75 $ 13.13 7.78
-----------
261,155 $ 10.14 8.33
Options exercisable 24,750 $ 4.00--$8.00 $ 7.20
37,245 $ 8.01--$12.00 $ 9.19
10,970 $ 12.01--$16.75 $ 13.02
-----------
72,965 $ 9.50
</TABLE>
AR-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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. No provision for a
contribution has been made for 1997. However, the Board of Directors, at its
August 27, 1997 meeting approved a corporate match of 25 cents per dollar of
the first 6% of each participant's contributions to the plan for fiscal
1998. Provisions of approximately $46,000, and $40,000 were recorded in 1996
and 1995, respectively, for the Company's contributions to the 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. In fiscal 1997 and 1995, no bonuses were
earned. Bonuses of $104,500 accrued in fiscal 1996 for key management
employees were dis-tributed during fiscal 1997.
(10) OFF-BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
At September 27, 1997, and September 28, 1996, the Company was
contingently liable under open standby letters of credit totaling $839,158
and $66,910, 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 27, 1997, 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 foreign
credit insurance.
(11) RELATED PARTY TRANSACTIONS
Herbert A. Lerner, Company Director and Treasurer, and James A.
McCalmont, Director, are Trustees of the Technical Communications
Corporation Employees' Stock Ownership Trust. At its August 27, 1997
meeting, the Board of Directors voted to terminate the Employee Stock
Ownership Plan effective October 1, 1997.
Edward E. Hicks, Esq., the Company's Secretary and Clerk, is a member of
a law firm that provides legal services to the Company.
Page AR-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Lawrence A. Kletter, Esq., who resigned as a director during fiscal year
1997, is a member of a law firm that provided legal services to the Company.
Carl H. Guild, Jr., elected to the Board of Directors effective May 1,
1997, serves as a consultant for the Company, earning $52,500 in this
capacity during fiscal 1997.
During fiscal years 1997 and 1996, the Company incurred expenses of
$116,038 and $96,360, respectively, to FutureComms, Inc., a privately held
telecommunications software consulting services company. FutureComms is
owned and operated by Michelle D. Gerard, the wife of the Company's
President and CEO. FutureComms' work ended on August 29, 1997.
During 1996 and 1995, the Company leased a sales office from its
Chairman; lease payments were $1.00 in each year. The fair market value of
such rent was estimated to be below $5,000 per year.
On June 27, 1995, the Company invested $250,800 for a minority interest
in Series B Preferred Stock of Net2Net Corporation, a privately held company
that develops high performance management and analysis systems for
Asynchronous Transfer Mode (ATM) networks. The Company also paid a deposit
for inventory, purchased at a discounted price, valued at $244,200 as well
as entered into an eighteen month distribution agreement with Net2Net that
gave the Company the exclusive right to sell Net2Net products to certain
U.S. Government departments. As of September 27, 1997, $144,283 of the
inventory has been sold and the remain-ing amount of $99,917 has been either
written-down or fully reserved. Net2Net's president is Stephen McCalmont,
son of Arnold McCalmont, and brother to James McCalmont. Arnold and James
McCalmont, as well as Herbert Lerner, are also investors 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.
On December 12, 1997, the Board of Directors announced that it has
undertaken an internal review of certain of its historical service
contracts. On January 13, 1998 the Company announced that the results
from its internal review concluded that certain of TCC's internal
approval and control procedures were not followed in connection with such
contracts. However, the Company does not believe that this will result in
a material liability or asset impairment to the Company or otherwise have
any material effect on the financial position or results of operations of
the Company.
(13) MAJOR CUSTOMERS AND EXPORT SALES
In fiscal 1997, the Company had three customers representing 51% (25%,
13%, and 13%) of net 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, representing 57% (24%, 20%, and 13%) of net
sales.
Page AR-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A breakdown of net sales is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
FOR THE FISCAL YEARS ENDED: 1997 1996 1995
- -------------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Domestic............................................................ $ 2,734,690 $ 3,633,425 $ 1,535,015
Foreign............................................................. 9,523,948 10,379,377 8,692,550
------------- ------------- -------------
Total............................................................... $ 12,258,638 $ 14,012,802 $ 10,227,565
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
A summary of foreign sales by geographic area follows:
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
FOR THE FISCAL YEARS ENDED: 1997 1996 1995
- -------------------------------------------------------------------- --------------- --------------- ---------------
<S> <C> <C> <C>
North America (excluding the U.S.).................................. 1.0% 1.3% 2.9%
Central and South America........................................... 33.8% 6.7% 6.5%
Europe.............................................................. 6.1% 11.6% 14.2%
Mid-East and Africa................................................. 53.8% 46.0% 59.7%
Far East............................................................ 5.3% 34.4% 16.7%
----- ----- -----
Total............................................................... 100.0% 100.0% 100.0%
----- ----- -----
----- ----- -----
</TABLE>
(14) LEASES
The Company leases its headquarters under an operating lease.
The Company has renewed the lease on its headquarters located in
Concord, Massachusetts through June 30, 2000. Future minimum lease payments
depend on the Consumer Price Index at December 31, 1997, but are estimated
at $158,700 a year through fiscal 1999 and $119,000 for the first nine
months of fiscal 2000. This lease may be further renewed for an additional
two and one-half years through 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 the end of the current renewal term, and of the
additional renewal term, if elected. Annual rental expense amounted to
$146,160 during fiscal years 1995 through 1997.
(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. These bank loans were subsequently paid off in November 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 resulted in
unallocated excess purchase cost over net assets acquired (goodwill) of
Page AR-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$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 pro forma 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.
The pro forma net sales and net loss do not purport to represent what
the Company's results of operations would have been if such transactions 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>
ESTIMATED
SEPTEMBER 27, SEPTEMBER 28, USEFUL
1997 1996 LIFE
------------- ------------- ------------
<S> <C> <C> <C>
Engineering and manufacturing equipment................ $ 1,920,289 $ 1,942,723 3--8 years
Demonstration equipment................................ 922,696 785,178 3--5 years
Furniture and fixtures................................. 1,036,423 1,000,354 3--8 years
Automobiles............................................ 89,899 89,899 5 years
Leasehold improvements................................. 413,348 405,662 2--5 years
------------- ------------- ------------
Total equipment and leasehold improvements............. $ 4,382,655 $ 4,223,816 2--8 years
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
(17) FAIR VALUE 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.
Page AR-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 Note 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-22
<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 27, 1997, and September 28, 1996, and the related
consolidated statements of operations, cash flows, and stockholders' equity
for the years ended September 27, 1997, September 28, 1996, and September 30,
1995. 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 27, 1997 and
September 28, 1996, and the results of their operations and their cash flows
for the years ended September 27, 1997, September 28, 1996 and September 30,
1995, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
- -----------------------
Boston, Massachusetts
October 29, 1997 (except with respect to the matter
discussed in Note 12 as to which the date
is January 15, 1998)
Page AR-23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BE REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000096699
<NAME> TECHNICAL COMMUNICATIONS CORP.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-27-1997<F1>
<PERIOD-START> SEP-29-1996
<PERIOD-END> SEP-27-1997
<CASH> 1,876,748
<SECURITIES> 0
<RECEIVABLES> 3,482,587
<ALLOWANCES> 25,000
<INVENTORY> 3,423,979
<CURRENT-ASSETS> 9,486,073
<PP&E> 4,382,655
<DEPRECIATION> 3,200,075
<TOTAL-ASSETS> 12,456,253
<CURRENT-LIABILITIES> 2,946,207
<BONDS> 0
0
0
<COMMON> 127,370
<OTHER-SE> 9,382,676
<TOTAL-LIABILITY-AND-EQUITY> 12,456,253
<SALES> 12,258,638
<TOTAL-REVENUES> 12,387,360
<CGS> 5,153,663
<TOTAL-COSTS> 5,153,663
<OTHER-EXPENSES> 8,827,719
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63,979
<INCOME-PRETAX> (1,658,001)
<INCOME-TAX> (414,500)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,243,501)
<EPS-PRIMARY> (.98)
<EPS-DILUTED> (.98)
<FN>
<F1>THE COMPANY'S BY-LAWS CALL FOR ITS FISCAL YEAR TO END ON THE SATURDAY
CLOSEST TO THE LAST DAY OF SEPTEMBER.
</FN>
</TABLE>
