<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ------ Exchange Act of 1934 for the quarterly period ended April 3, 1999 or
- ------ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period to
Commission File Number: 0-8588
TECHNICAL COMMUNICATIONS CORPORATION
------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2295040
- -------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
100 Domino Drive, Concord, MA 01742-2892
- ---------------------------------------- ----------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (978) 287-5100
-----------------------
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Number of shares of Common
Stock, $.10 par value, outstanding as of May 7, 1999: 1,376,951
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets,
as of April 3, 1999 (unaudited) and October 3, 1998 1
Condensed Consolidated Statements of Operations,
Quarter ended April 3, 1999 and March 28, 1998 (unaudited) 2
Six (6) months ended April 3, 1999 and March 28, 1998 (unaudited) 3
Condensed Consolidated Statements of Cash Flows, Six (6) months ended
April 3, 1999 and March 28, 1998 (unaudited) 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 7
PART II Other Information 11
Signatures 12
</TABLE>
<PAGE>
PART I. Financial Information - Item 1. Financial Statements
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
April 3, 1999
(unaudited) October 3, 1998
------------ ---------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,554,772 $ 740,049
Accounts receivable - trade, less allowance for doubtful
accounts of $70,000 719,081 8,196,296
Other receivables 1,286,582 --
Inventories 4,206,946 3,119,291
Other current assets 967,999 949,536
------------ ------------
Total current assets 9,735,380 13,005,172
Equipment and leasehold improvements 4,841,393 4,818,515
Less: accumulated depreciation and amortization 3,986,431 3,773,457
------------ ------------
854,962 1,045,058
Goodwill 1,614,131 1,614,131
Less: accumulated amortization 823,897 716,443
------------ ------------
790,234 897,688
Other assets 337,226 1,224,811
------------ ------------
$ 11,717,802 $ 16,172,729
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 460,282 $ 302,742
Revolving line of credit -- 2,250,000
Accrued liabilities
Compensation and related expenses 389,705 401,596
Other 1,244,412 2,241,434
------------ ------------
Total current liabilities 2,094,399 5,195,772
------------ ------------
Other long-term liabilities 256,042 456,356
Commitments and contingencies
Stockholders' Equity:
Common stock, par value $.10 per share; authorized
3,500,000 shares; issued and outstanding 1,376,951
shares at 4/3/99 and 1,283,238 shares at 10/3/98 129,454 128,324
Treasury stock at cost, 27,063 shares at 4/3/99 and
30,678 shares at 10/3/98 (213,388) (241,861)
Additional paid-in capital 1,305,870 1,266,197
Unrealized gain on investment, net 54,568 422,000
Retained earnings 8,090,857 8,945,941
------------ ------------
Total stockholders' equity 9,367,361 10,520,601
------------ ------------
$ 11,717,802 $ 16,172,729
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
Page 1
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TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended
--------------
April 3, 1999 March 28, 1998
------------- --------------
<S> <C> <C>
Net sales $ 1,247,336 $ 3,405,457
Cost of sales 532,922 1,294,873
----------- -----------
Gross profit 714,414 2,110,584
Operating expenses:
Selling, general and
administrative expenses 1,058,640 1,544,294
Product development costs 552,606 300,365
----------- -----------
Total operating expenses 1,611,246 1,844,659
----------- -----------
Operating income (loss) (896,832) 265,925
----------- -----------
Other income (expense):
Gain on sale of investment 1,056,638 --
Interest income 41,477 6,004
Interest expense (442) (31,127)
Other (4,708) (3,280)
----------- -----------
Total other income (expense): 1,092,965 (28,403)
----------- -----------
Income before income taxes 196,133 237,522
Provision for income taxes 49,033 59,380
----------- -----------
Net income $ 147,100 $ 178,142
----------- -----------
----------- -----------
Net income per common share:
Basic $ 0.11 $ 0.14
Diluted $ 0.11 $ 0.14
Weighted average common shares outstanding
used in computation:
Basic 1,368,046 1,283,238
Diluted 1,371,235 1,285,921
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
Page 2
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TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
April 3, 1999 March 28, 1998
------------- --------------
<S> <C> <C>
Net sales $ 2,318,693 $ 6,340,505
Cost of sales 940,234 2,865,959
----------- -----------
Gross profit 1,378,459 3,474,546
Operating expenses:
Selling, general and
administrative expenses 2,528,551 2,871,436
Product development costs 1,092,268 533,356
----------- -----------
Total operating expenses 3,620,819 3,404,792
----------- -----------
Operating income (loss) (2,242,360) 69,754
----------- -----------
Other income (expense):
Gain on sale of investment 1,056,638 --
Interest income 76,142 17,393
Interest expense (3,648) (31,127)
Other (8,489) 9,878
----------- -----------
Total other income (expense): 1,120,643 (3,856)
----------- -----------
Income (loss) before income taxes (1,121,717) 65,898
Provision (benefit) for income taxes (280,429) 16,475
----------- -----------
Net income (loss) $ (841,288) $ 49,423
----------- -----------
Net income (loss) per common share:
Basic $ (.63) $ 0.04
Diluted $ (.63) $ 0.04
Weighted average common shares outstanding used in computation:
Basic 1,327,953 1,280,544
Diluted 1,327,953 1,290,009
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
Page 3
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TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
April 3, 1999 March 28, 1998
------------- --------------
<S> <C> <C>
Operating Activities:
Net income (loss) $ (841,288) $ 49,423
Adjustments to reconcile net loss to net cash provided (used) by operating
activities:
Depreciation and amortization 409,789 395,170
Non-cash compensation 14,678 --
Gain on sale of investment (1,056,638) --
Changes in assets and liabilities:
Accounts receivable 7,477,215 895,554
Unbilled revenue -- (3,815,501)
Inventories (1,087,655) (655,881)
Refundable income taxes 61,555 233,426
Other current assets (80,018) 17,628
Accounts payable and other accrued liabilities (853,070) 26,197
----------- -----------
Net cash (used) provided by operating activities 4,044,568 (2,853,984)
----------- -----------
Investing Activities:
Additions to equipment and leasehold improvements (22,878) (265,171)
Investment in capitalized software -- (152,486)
Other 2,230 (4,612)
----------- -----------
Net cash used by investing activities (20,648) (422,269)
----------- -----------
Financing Activities:
Proceeds from stock issuance 40,803 50,689
Borrowings under line of credit -- 2,000,000
Payment of line of credit (2,250,000) --
----------- -----------
Net cash provided (used) by financing activities (2,209,197) 2,050,689
Net increase (decrease) in cash and cash equivalents 1,814,723 (1,225,564)
Cash and cash equivalents at beginning of the period 740,049 1,876,748
----------- -----------
Cash and cash equivalents at the end of the period $ 2,554,772 $ 651,184
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 19,814 $ 31,127
Income taxes paid (refunds received), net 78,336 (231,072)
</TABLE>
NON-CASH TRANSACTIONS:
During the six months ended April 3, 1999, the Company sold its investment in
common stock of Visual Networks, Inc. and is due proceeds from the sale in the
amount of $1,288,633.
During the six months ended March 28, 1998, the Company incurred a capital lease
obligation of $88,841 in connection with a lease agreement to acquire computer
equipment.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
Page 4
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TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FORWARD-LOOKING STATEMENTS
Note: The discussions in this Form 10-Q, including any discussion of or
impact, expressed or implied, on the Company's anticipated operating results
and future earnings, including statements about the Company's ability to
achieve growth and profitability, contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended. The
Company's operating results may differ significantly from the results
indicated by such forward-looking statements. The Company's operating results
may be affected by many factors, including but not limited to 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 and the Company's ability to renegotiate its line of
credit with its banks. Although the Company's securities trade on the NASDAQ
National Market System, no assurances can be given that the Company will
continue to be in compliance with all listing requirements or that the
Company's securities will continue to be listed on NASDAQ National Market or
on NASDAQ SmallCap market. The delisting of the Company's securities from the
NASDAQ could have a material adverse effect on the market price of the
Company's securities. These and other risks are detailed from time to time in
the Company's filings with the Securities and Exchange Commission, including
Form 10-K for the fiscal year ended October 3, 1998, Form 10-Q for the
quarter ended January 2, 1999 and this Form 10-Q for the quarter ended April
3, 1999.
STATEMENT OF FAIR PRESENTATION
INTERIM FINANCIAL STATEMENTS. The accompanying unaudited condensed consolidated
financial statements include all adjustments (consisting only of normal
recurring accruals) which are, in the opinion of management, necessary for fair
presentation of the results of operations for the periods presented. Interim
results are not necessarily indicative of the results to be expected for a full
year.
Certain disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted as allowed by Form 10-Q. The accompanying unaudited consolidated
financial statements should be read in conjunction with Company's consolidated
financial statements for the year ending October 3, 1998 as filed with the
Securities and Exchange Commission on Form 10-K.
NOTE 1. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
April 3, 1999 October 3, 1998
------------- ---------------
<S> <C> <C>
Finished Goods $ 223,910 $ 173,141
Work in Process 1,094,095 776,047
Raw Materials 2,888,941 2,170,103
---------- ----------
$4,206,946 $3,119,291
---------- ----------
---------- ----------
</TABLE>
Page 5
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NOTE 2. DEBT
As of April 3, 1999, the Company had a $5,000,000 revolving line of credit at a
rate of prime plus 1/2 of 1% with Wainwright Bank and Trust Company. This line
of credit is secured by a pledge of substantially all the assets of the Company,
requires no compensating balances, and matured on May 1, 1999. Under the terms
of the line of credit agreement, the Company is required to comply with certain
loan covenants. As of April 3, 1999 the Company is compliant with these
covenants. Availability under the line of credit had been reduced by $886,611,
as of April 3, 1999, as a result of standby letters of credit. No other
borrowings are outstanding against the line. In the prior year during the six
months ended March 28, 1998, the Company borrowed $2,000,000 under its line of
credit.
Effective May 1, 1999 the company renewed its existing line of credit. The new
agreement will expire May 1, 2000 and contains substantially the same terms as
the existing agreement. Two additional covenants have been added, which restrict
the amount of borrowings to a percentage of certain accounts receivable and
inventory balances. Management believes this arrangement in combination with its
existing cash balances and cash generated from operations will be adequate to
meet its liquidity and capital requirements for the foreseeable future.
NOTE 3. COMMITMENTS AND CONTINGENCIES
The Company is the defendant in GERARD v. TECHNICAL COMMUNICATIONS CORPORATION,
ET AL., filed in the United States Court for the District of Massachusetts in
1998. This case arises from disputes concerning the hiring and termination of
Roland Gerard, former president of the Company. According to the Complaint, the
Company violated federal securities laws in the hiring process for Mr. Gerard by
making false statements about the Company which induced him to accept
employment, the compensation for which included certain stock options. The
Complaint also alleges breach of contract, wrongful termination, and civil
conspiracy. At present, the Company's motion to dismiss is pending. Because of
the early stage of the litigation, it is impossible to determine the ultimate
outcome. The Company is determined to contest this suit vigorously.
NOTE 4. COMPREHENSIVE INCOME
During the first quarter of fiscal 1999 the Company adopted Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income". SFAS 130 established standards for the reporting and display of
comprehensive income and its components. In general, comprehensive income
combines net income and "other comprehensive income", which represents
unrealized gain on securities available for sale. During the six months and
quarter ended April 3, 1999 the Company's comprehensive loss totaled
($1,208,720) and ($447,532), respectively.
NOTE 5. SALE OF INVESTMENT IN VISUAL NETWORK, INC. COMMON STOCK
On April 1, 1999 the Company sold the majority of shares of its investment in
Visual Network, Inc. common stock. The Company recognized a gain on the sale of
$1,056,638 on a cost basis of $231,995. The proceeds from the sale were received
on April 5, 1999 and are included in other receivables at April 3, 1999.
Page 6
<PAGE>
PART I, Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
The Company is in the business of designing, manufacturing and marketing
communications security equipment. The Company receives orders for equipment
from customers, which may take several months or longer to manufacture and ship.
With the exception of long-term contracts where revenue is recognized under the
percentage of completion method, the Company generally recognizes income on a
unit-of-delivery basis. This latter method can cause revenues to vary widely
from quarter to quarter and therefore quarterly comparisons of revenue may not
be indicative of any trend.
QUARTER ENDED APRIL 3, 1999 AS COMPARED TO QUARTER ENDED MARCH 28, 1998
Net sales for the quarters ended April 3, 1999 and March 28, 1998, were
$1,247,337 and $3,405,457, respectively. This decrease of 63% is attributed to
variability in revenue recognition as a result of the timing of shipments and
the receipt of anticipated orders.
Gross profit for the second quarter of fiscal 1999 was $714,414 as compared to
gross profit of $2,110,584 for the same period of fiscal year 1998. This
represented a 66% decrease in gross profit for the quarter. Gross profit
expressed as a percentage of sales was 57% in 1999 as compared to 62% for the
same period in fiscal year 1998.
Selling, general and administrative expenses for the second quarter of fiscal
1999 and 1998 were $1,058,640 and $1,544,294, respectively. This decrease of 31%
was primarily attributable to approximately $390,000 in payroll and travel
related costs and commissions and contract services support, associated with the
lower sales volume. In addition, there was a decrease in professional services
fees of approximately $138,000. These decreased costs were partially offset by
an increase of approximately $45,000 in promotional and advertising expenses
associated with new product introductions.
Product development costs for the quarter ended April 3, 1999 were $552,606
compared to $300,365 for the same period in fiscal 1998. This increase of 84%
was attributable to the continued commitment to new product development,
particularly the Cipher X 7000 series product line.
As a result of the Company's increase in cash available for investment and no
borrowings on its line of credit, net interest income increased from a net
expense of $25,123 during the second quarter of fiscal 1998 to a net income
position of $41,035 for the same period in the current year.
The Company achieved net income of $147,100 for the second quarter of fiscal
1999 as compared to net income of $178,142 for the same period in fiscal 1998.
Included in the net income for the second quarter of fiscal 1999 is a one-time
gain on the sale of an investment of $1,056,638 and a loss from operations of
$896,832. The decrease in operating profitability is primarily attributable to
the decrease in gross profit as described above.
SIX MONTHS ENDED APRIL 3, 1999 AS COMPARED TO SIX MONTHS ENDED MARCH 28, 1998
Net sales for the six months ended April 3, 1999 and March 28, 1998, were
$2,318,693 and $6,340,505, respectively. This decrease of 63% in net sales is
attributed to variability in revenue recognition as a result of the timing of
shipments as well as delays in the receipt of some anticipated orders.
Gross profit for the six months ended April 3, 1999 was $1,378,459, as compared
to gross profit of $3,474,546 for the same period of fiscal year 1998. This
represented a 60% decrease in gross profit for the period. Gross profit
expressed as a percentage of sales was 59% in 1999 as compared to 55% for the
same
Page 7
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period in fiscal year 1998. The disparity between the two fiscal years is
attributed to the sale of a more favorable mix of higher margin products during
1999.
Operating expenses for the first six months of fiscal 1999 were $2,528,551 and
the first six months of fiscal 1998 operating expenses were $2,871,436. This
decrease of 12% was primarily attributable to approximately $690,000 in payroll
and travel related costs and commissions and contract services support,
associated with the lower sales volume. In addition there was a decrease in
professional services fees of approximately $275,000. These decreased costs were
partially offset by approximately $475,000 in costs associated with the
settlement of litigation and an increase in promotional and advertising expenses
associated with new product introductions of approximately $82,000.
Product development costs for the six months ended April 3, 1999 were $1,092,268
compared to $533,356 for the same period in fiscal 1998. This increase of 105%
was attributable to the continued commitment to new product development,
particularly the Cipher X 7000 series product line.
As a result of the Company's increase in cash available for investment and no
borrowings on its line of credit, net interest income increased from a net
expense of $13,734 during the first six months of fiscal 1998 to a net income
position of $72,494 for the same period in the current year.
The Company incurred a net loss of $841,288 for the first six months of fiscal
1999 as compared to net income of $49,423 for the same period in fiscal 1998.
Included in the net loss for the first six months of fiscal 1999 is a one-time
gain on the sale of an investment of $1,056,638 and a loss from operations of
$2,242,360. The decrease in profitability is primarily attributable to the
decrease in gross profit and the increase in operating spending as described
above.
YEAR 2000 COMPLIANCE UPDATE
Technical Communications Corporation has been actively addressing the Year 2000
(Y2K) problem since April 1998. Generally speaking, the Y2K problem results from
the use of two-digit, rather than four-digit, date years in computer systems and
software applications. Today, many systems rely on two (or one) digits to
represent the year portion of a date. For example, 1997 is usually stored as 97
(or 7). As a result, the year 2000, represented by 00 (or 0), could be
interpreted as 1900. This type of error could cause problems when systems
display, calculate, store and print dates.
The Company understands the importance of identifying and solving the Y2K
problem. As a supplier of mission-critical encryption products, the Company is
committed to providing products that will function, without interruption, into
the year 2000. In addition, Technical Communications Corporation is taking
proactive steps to ensure that all critical systems, from both an internal and
external perspective, are reviewed and, if necessary, corrected.
COMPANY'S STATE OF READINESS
Technical Communications Corporation has divided its Y2K efforts into three
major areas: (i) products and customers, (ii) enterprise business systems and
information technology and (iii) external systems and suppliers. The review of
each area will consist of an inventory of potentially affected systems, an
assessment of Y2K readiness and corrective action deployment. As indicated, the
Company has been actively working on Y2K related issues for eleven months, and
is prioritizing its efforts based on how severe an effect a potential
noncompliance would have on customer service and core business functions. It is
anticipated that the entire Y2K initiative will be complete by June 1999.
Product testing and internal/ external system evaluations have been completed.
To facilitate the plan, the Company has appointed a program manager to oversee
all Y2K initiatives.
Page 8
<PAGE>
Technical Communications Corporation has tested all of its current products for
Y2K problems. A product is deemed Y2K compliant if the product, when used in
accordance with its associated documentation, is capable of processing,
receiving, and/ or providing data within or between the 20(th) and 21(st)
centuries, provided that all other products used in conjunction with the product
in question properly exchange date data with that product. It should be noted
that certain TCC products deemed to be Y2K compliant may require a service
update in order to achieve Y2K compliant status.
Although no assurances can be given, the Company believes that all current
products are either Y2K compliant, or can be made Y2K compliant with minor
adjustments or software upgrades. This product assessment has identified
date-related issues with certain older products that TCC no longer manufactures
or sells. It is the Company's intent to offer upgrades or alternative products
where reasonably practicable. In some cases the Company sells encryption systems
that interact with third party products or operate with computer systems not
under the Company's control. There can be no assurances that such third party
equipment will function correctly into the year 2000.
TCC's internal Y2K initiative includes a review of all computer hardware and
software related systems including; internal LAN, product development tools,
facility operations, interfaces with third parties via EDI links and desktop
systems. The inventory and assessment phase of this review complete. The
Company's enterprise information system, which includes manufacturing, financial
accounting and sales administration, is year 2000 compliant. At this time, the
Company does not anticipate that any internal system will create a substantive
disruption in the Company's operation into the year 2000.
The Y2K external systems review process consists of identifying and contacting
suppliers and service providers that are believed to be significant to the
Company's business operations. The Company will assess each supplier's Y2K
readiness based on its formal response to a TCC Y2K status request. The Company
intends to monitor the Y2K compliant process of key suppliers that either
indicate they are not yet Y2K compliant or do not respond to the Company's
requests. This process is ongoing and is expected to continue into 1999.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
As of April 3, 1999, the Company has incurred expenses related to the year 2000
problem of approximately $35,000. The main portion of these costs relates to the
evaluation and testing of products for Y2K compliance. The Company anticipates
additional costs ranging from $25,000--$40,000 in order to complete the Y2K
process and to upgrade a small number of older products currently still in use.
The preceding numbers represent TCC's best estimate of remediation costs
pertaining to Y2K issues. There can be no assurances that the Company will not
encounter unexpected costs or delays in achieving year 2000 compliance.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES
Based on current information, the Company believes that the year 2000 problem
will not have a material adverse effect on the Company's overall business and
financial condition. Since all current products are either Y2K compliant or can
be made Y2K compliant, future sales of all such products do not represent a Y2K
risk to the Company. Even though TCC is adopting a proactive strategy, there can
be no assurances that year 2000 problems will not have any impact on the
business. Despite efforts to ensure that products will function correctly into
the year 2000, The Company may see an increase in warranty and other claims,
especially those related to older products or products that incorporate third
party software or hardware. If any of the Company's material suppliers or
service providers experience unforeseen Y2K issues, the Company's production,
product development, and operations may also be materially adversely effected.
COMPANY'S CONTINGENCY PLAN
TCC is working diligently to minimize the risks associated with Y2K issues. The
Company plans to dedicate appropriate resources to address all known Y2K related
issues in an expeditious manner. In addition, the Company is prepared to take
immediate action on unforeseen problems as they arise. Such action may include
the use of alternative sources of supply to support manufacturing and product
development.
Page 9
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RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. FAS No. 133 is
effective for fiscal years beginning after June 15, 1999. Management does not
expect the adoption of this statement to have a material impact on its financial
condition or results of operations.
During the first quarter of fiscal 1999 the company adopted Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures About Segments
of an Enterprise and Related Information". SFAS 131 established standards for
the way that public companies report information about operating segments in
financial statements. This Statement supercedes Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise", but retains the requirement to report information about major
customers. The adoption of this Statement did not have a material effect on the
Company's financial statements.
MARKET RISK
The Company is exposed to market risk from changes in equity prices, which could
affect its future results of operations and financial condition. The Company's
long-term available-for-sale investment, in Visual Networks, Inc., represents a
publicly traded equity security that is sensitive to fluctuations in price.
Changes in equity prices would result in changes in the fair value of the
Company's long-term available-for-sale investment due to the difference between
the current market price and the market price at the last balance sheet date.
Market risk has been significantly reduced by the sale of most of the Company's
investment in the security. A 10% decrease in the market equity prices of April
3, 1999 would not have a material impact on the book value of the Company's
stockholders' equity.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $1,814,723 or 245% to $2,554,772 as of
April 3, 1999, from a balance of $740,049 at October 3, 1998. This increase was
primarily due to the reduction of accounts receivable and partially offset by an
increase in inventory and a reduction in current liabilities. The current ratio
increased to 4.6:1 at April 3, 1999 compared to 2.5:1 as of October 3, 1998,
primarily as a result of the cash received on accounts receivable during the
period.
As of April 3, 1999, the Company had a $5,000,000 revolving line of credit at a
rate of prime plus 1/2 of 1% with Wainwright Bank and Trust Company. This line
of credit is secured by a pledge of substantially all the assets of the Company,
requires no compensating balances, and matured on May 1, 1999. Under the terms
of the line of credit agreement, the Company is required to comply with certain
loan covenants. As of April 3, 1999 the Company is compliant with these
covenants. Availability under the line of credit had been reduced by $886,611 as
of April 3, 1999, as a result of standby letters of credit. No other borrowings
are outstanding against the line. In the prior year during the six months ended
March 28, 1998, the Company borrowed $2,000,000 under its line of credit.
Effective May 1, 1999 the company renewed its existing line of credit. The new
agreement will expire May 1, 2000 and contains substantially the same terms as
the previous agreement. Two additional covenants have been added, which restrict
the amount of borrowings to a percentage of certain accounts receivable and
inventory balances. Management believes this arrangement in combination with its
existing cash balances and cash generated from operations will be adequate to
meet its liquidity and capital requirements for the foreseeable future.
Page 10
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
The Company is the defendant in GERARD v. TECHNICAL COMMUNICATIONS CORPORATION,
ET AL., filed in the United States Court for the District of Massachusetts in
1998. This case arises from disputes concerning the hiring and termination of
Roland Gerard, former president of the Company. According to the Complaint, the
Company violated federal securities laws in the hiring process for Mr. Gerard by
making false statements about the Company which induced him to accept
employment, the compensation for which included certain stock options. The
Complaint also alleges breach of contract, wrongful termination, and civil
conspiracy. At present, the Company's motion to dismiss is pending. Because of
the early stage of the litigation, it is impossible to determine the ultimate
outcome. The Company is determined to contest this suit vigorously.
Item 2. Changes in Securities:
Not applicable.
Item 3. Defaults Upon Senior Securities:
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders:
None.
Item 5. Other Information:
None.
Item 6. Exhibits and Reports on Form 8-K:
a. Exhibits:
Exhibit 27: Financial Data Schedule
b. Reports on Form 8-K:
None.
Page 11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHNICAL COMMUNICATIONS CORPORATION
------------------------------------
(Registrant)
May 13, 1999 By: /s/ Carl H. Guild, Jr.
- ------------ ---------------------------------
Date Carl H. Guild, Jr., President and Chief
Executive Officer
May 13, 1999 By: /s/ Michael P. Malone
- ------------ ---------------------------------
Date Michael P. Malone, Director of Finance
and Principal Financial Officer
Page 12
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<PAGE>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-2-1999
<PERIOD-START> JAN-2-1999
<PERIOD-END> APR-3-1999
<CASH> 2,554,772
<SECURITIES> 0
<RECEIVABLES> 2,075,663
<ALLOWANCES> 70,000
<INVENTORY> 4,206,946
<CURRENT-ASSETS> 9,735,380
<PP&E> 4,841,393
<DEPRECIATION> 3,986,431
<TOTAL-ASSETS> 11,717,802
<CURRENT-LIABILITIES> 2,094,399
<BONDS> 0
0
0
<COMMON> 129,454
<OTHER-SE> 9,237,907
<TOTAL-LIABILITY-AND-EQUITY> 11,717,802
<SALES> 2,318,693
<TOTAL-REVENUES> 3,451,473
<CGS> 940,234
<TOTAL-COSTS> 4,561,053
<OTHER-EXPENSES> 8,489
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,648
<INCOME-PRETAX> (1,121,717)
<INCOME-TAX> (280,429)
<INCOME-CONTINUING> (841,288)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (841,288)
<EPS-PRIMARY> (.63)
<EPS-DILUTED> (.63)
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