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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 July 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
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(Exact name of registrant as specified in its charter)
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<S> <C>
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)
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Registrant's telephone number, including area code: (978) 287-5100
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N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Number of shares of Common
Stock, $.10 par value, outstanding as of August 6, 1999: 1,376,951
<PAGE>
INDEX
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PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets,
as of July 3, 1999 (unaudited) and October 3, 1998 1
Condensed Consolidated Statements of Operations,
Quarter ended July 3, 1999 and June 27, 1998 (unaudited), 2
Nine (9) months ended July 3, 1999 and June 27, 1998 (unaudited), 3
Condensed Consolidated Statements of Cash Flows,
Nine (9) months ended July 3, 1999 and June 27, 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
Item 3. Quantitative and Qualitative Disclosures about Market Risk 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
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PART I. Financial Information - Item 1. Financial Statements
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
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<CAPTION>
July 3, 1999 October 3, 1998
(Unaudited) -----------
-----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,262,138 $ 740,049
Accounts receivable - trade, less allowance for
doubtful accounts of $70,000 494,795 8,196,296
Inventories 3,908,002 3,119,291
Other current assets 911,643 949,536
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Total current assets 8,576,578 13,005,172
Equipment and leasehold improvements 4,833,634 4,818,515
Less: accumulated depreciation and amortization 4,084,129 3,773,457
----------- -----------
749,505 1,045,058
Goodwill 1,614,131 1,614,131
Less: accumulated amortization 877,625 716,443
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736,506 897,688
Other assets 282,716 1,224,811
$ 10,345,305 $ 16,172,729
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------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 388,999 $ 302,742
Revolving line of credit -- 2,250,000
Accrued liabilities
Compensation and related expenses 463,472 401,596
Other 478,045 2,241,434
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Total current liabilities 1,330,516 5,195,772
----------- -----------
Other long-term liabilities 249,513 456,356
Commitments and contingencies
Stockholders' Equity:
Common stock, par value $.10 per share; authorized
3,500,000 shares; issued and outstanding 1,376,951
shares at 7/3/99 and 1,283,238 shares at 10/3/98 129,454 128,324
Treasury stock at cost, 27,063 shares at 7/3/99 and
30,678 shares at 10/3/98 (213,375) (241,861)
Additional paid-in capital 1,305,870 1,266,197
Unrealized gain on investment, net 46,412 422,000
Retained earnings 7,496,915 8,945,941
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Total stockholders' equity 8,765,276 10,520,601
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$ 10,345,305 $ 16,172,729
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
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TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
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<CAPTION>
Quarters Ended
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July 3, 1999 June 27, 1998
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<S> <C> <C>
Net sales $ 1,361,671 $ 3,281,399
Cost of sales 690,853 1,157,505
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Gross profit 670,818 2,123,894
Operating expenses:
Selling, general and
administrative expenses 1,043,694 1,385,374
Product development costs 453,850 378,347
------------- -----------
Total operating expenses 1,497,544 1,763,721
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Operating income (loss) (826,726) 360,173
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Other income (expense):
Interest income 38,208 3,396
Interest expense (426) (65,587)
Other (2,959) (1,429)
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Total other income (expense): 34,823 (63,620)
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Income (loss) before income taxes (791,903) 296,553
Provision (benefit) for income taxes (197,976) 74,138
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Net income (loss) $ (593,927) $ 222,415
-------------- -----------
-------------- -----------
Net income (loss) per common share:
Basic $ (0.43) $ 0.17
Diluted $ (0.43) $ 0.17
Weighted average common shares outstanding used in computation:
Basic 1,376,951 1,283,238
Diluted 1,376,951 1,287,729
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
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Nine Months Ended
July 3, 1999 June 27, 1998
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<S> <C> <C>
Net sales $ 3,680,363 $ 9,621,904
Cost of sales 1,598,165 4,023,464
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Gross profit 2,082,198 5,598,440
Operating expenses:
Selling, general and
administrative expenses 3,605,168 4,256,810
Product development costs 1,546,118 911,703
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Total operating expenses 5,151,286 5,168,513
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Operating income (loss) (3,069,088) 429,927
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Other income (expense):
Gain on sale of investment 1,056,638 --
Interest income 114,350 20,789
Interest expense (4,074) (96,714)
Other (11,447) 8,449
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Total other income (expense): 1,155,467 (67,476)
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Income (loss) before income taxes (1,913,621) 362,451
Provision (benefit) for income taxes (478,405) 90,613
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Net income (loss) $ (1,435,216) $ 271,838
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Net income (loss) per common share:
Basic $ (1.07) $ 0.21
Diluted $ (1.07) $ 0.21
Weighted average common shares outstanding used in computation:
Basic 1,344,063 1,281,452
Diluted 1,344,426 1,288,620
</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)
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Nine Months Ended
July 3, 1999 June 27, 1998
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<S> <C> <C>
Operating Activities:
Net income (loss) $(1,435,216) $ 271,838
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation and amortization 605,896 605,611
Non-cash compensation 14,677 --
Gain on sale of investment (1,056,638) --
Changes in assets and liabilities:
Accounts receivable 7,701,501 (143,074)
Unbilled revenue - (3,582,716)
Inventories (788,711) (313,946)
Refundable income taxes 75,840 233,426
Other current assets ( 37,947) 202
Accounts payable and other accrued liabilities (1,619,090) (594,610)
------------ -----------
Net cash (used) provided by operating activities 3,460,312 (3,523,269)
------------ -----------
Investing Activities:
Additions to equipment and leasehold improvements (15,119) (318,084)
Proceeds from sale of investment 1,288,633 -
Investment in capitalized software - (263,217)
Cancellation of life insurance policies - 158,224
Other (2,540) (16,264)
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Net cash (used) provided by investing activities 1,270,974 (439,341)
------------- -----------
Financing Activities:
Proceeds from stock issuance 40,803 50,689
Borrowings under line of credit - 3,250,000
Payment of line of credit (2,250,000) (500,000)
------------ -----------
Net cash (used) provided by financing activities (2,209,197) 2,800,689
Net increase (decrease) in cash and cash equivalents 2,522,089 (1,161,921)
Cash and cash equivalents at beginning of the period 740,049 1,876,748
------------ ----------
Cash and cash equivalents at the end of the period $ 3,262,138 $ 714,827
------------ ----------
------------ ----------
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 20,256 $ 96,714
Income taxes paid (refunds received), net 64,051 (221,072)
</TABLE>
NON-CASH TRANSACTIONS:
During the nine months ended June 27, 1998, the Company incurred a capital lease
obligation of $20,370 in connection with a lease agreement to acquire computer
equipment.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
Page 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. 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, April 3, 1999 and this Form 10-Q for the
quarter ended July 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 the 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:
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<CAPTION>
July 3, 1999 October 3, 1998
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<S> <C> <C>
Finished Goods $ 181,070 $ 173,141
Work in Process 882,406 776,047
Raw Materials 2,844,526 2,170,103
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$ 3,908,002 $ 3,119,291
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NOTE 2. DEBT
As of July 3, 1999, the Company has 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 matures on May 1, 2000. Under
the terms of the line of credit agreement, the Company is required to comply
with certain loan covenants. As of July 3, 1999, the Company is compliant
with these covenants. Availability under the line of credit has been reduced
by approximately $100,000, as of July 3, 1999, as a result of standby letters
of credit. No other borrowings are outstanding against the line. In the prior
year during the nine months ended June 27, 1998, the Company borrowed
$2,750,000 under its line of credit.
On April 30, 1999, the above mentioned line of credit was renewed. An
additional covenant was added, which restricts 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 Superior Court of the Commonwealth of
Massachusetts in 1999. This case arises from disputes concerning the hiring
and termination of Roland Gerard, former president of the Company. The
Complaint alleges state law claims for breach of contract, wrongful
termination, and civil conspiracy. The Company intends to file a motion to
dismiss in the near future. 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. An earlier complaint brought by Mr. Gerard in
the Federal court, which included the state claims, and a federal securities
claim was dismissed in July 1999; the securities claims were dismissed with
prejudice.
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 nine months and
quarter ended July 3, 1999 the Company's comprehensive loss totaled
$1,810,804 and $602,085, 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. On July 9, 1999 and July 16, 1999,
the Company sold the remaining shares of its investment in Visual Network,
Inc. common stock. The Company will recognize a gain on the sale of $94,534
on a cost basis of $18,801, during the fourth quarter of 1999.
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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 JULY 3, 1999 AS COMPARED TO QUARTER ENDED JUNE 27, 1998
Net sales for the quarters ended July 3, 1999 and June 27, 1998, were
$1,362,000 and $3,281,000, respectively. This decrease of 59% is attributed
to variability in revenue recognition as a result of the timing of shipments
as well as delays in the receipt of anticipated orders.
Gross profit for the third quarter of fiscal 1999 was $671,000 as compared to
gross profit of $2,124,000 for the same period of fiscal year 1998. This
represented a 68% decrease in gross profit for the quarter. Gross profit
expressed as a percentage of sales was 49% in 1999 as compared to 65% for the
same period in fiscal year 1998. The disparity between the two fiscal years
is attributed to the sale of a less favorable mix of lower margin products
during 1999.
Selling, general and administrative expenses for the third quarter of fiscal
1999 and 1998 were $1,044,000 and $1,385,0000, respectively. This decrease of
25% was primarily attributable to a decrease of $253,000 in payroll and
travel related costs and commissions and contract services support,
associated with the lower sales volume and the continued emphasis on expense
controls. In addition, there was a decrease in professional service fees of
$147,000. These decreased costs were partially offset by an increase of
$89,000 in product demonstration costs.
Product development costs for the quarter ended July 3, 1999 were $454,000
compared to $378,000 for the same period in fiscal 1998. This increase of 20%
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 $62,000 during the third quarter of fiscal 1998 to a net income
position of $38,000 for the same period in the current year.
The Company incurred a net loss of $594,000 for the third quarter of fiscal
1999 as compared to net income of $222,000 for the same period in fiscal
1998. Included in the net loss for the third quarter of fiscal 1999 is a loss
from operations of $827,000. The decrease in operating profitability is
primarily attributable to the decrease in gross profit as described above.
NINE MONTHS ENDED JULY 3, 1999 AS COMPARED TO NINE MONTHS ENDED JUNE 27, 1998
Net sales for the nine months ended July 3, 1999 and June 27, 1998, were
$3,680,000 and $9,622,000, respectively. This decrease of 62% 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 nine months ended July 3, 1999 was $2,082,000, as
compared to gross profit of $5,598,000 for the same period of fiscal year
1998. This represented a 63% decrease in gross profit for the period. Gross
profit expressed as a percentage of sales was 57% in 1999 as compared to 58%
for the same
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period in fiscal year 1998. The disparity between the two fiscal years is
attributed to the sale of a less favorable mix of lower margin products
during 1999.
Operating expenses for the first nine months of fiscal 1999 were $3,605,000
and the first nine months of fiscal 1998 operating expenses were $4,257,000.
This decrease of 15% was primarily attributable to a decrease of $952,000 in
payroll and travel related costs and commissions and contract services
support, associated with the lower sales volume and the continued emphasis on
expense controls. In addition, there was a decrease in professional services
fees of $421,000. These decreased costs were offset by $475,000 in costs
associated with the settlement of litigation and an increase in promotional
and advertising expenses associated with new product introductions of $84,000
and $89,000 in product demonstration costs.
Product development costs for the nine months ended July 3, 1999 were
$1,546,000 compared to $912,000 for the same period in fiscal 1998. This
increase of 70% 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 $76,000 during the first nine months of fiscal 1998 to a net
income position of $110,000 for the same period in the current year.
The Company incurred a net loss of $1,435,000 for the first nine months of
fiscal 1999 as compared to net income of $272,000 for the same period in
fiscal 1998. Included in the net loss for the first nine months of fiscal
1999 is a one-time gain on the sale of an investment of $1,057,000 and a loss
from operations of $3,069,000. The decrease in profitability is primarily
attributable to the decrease in gross profit 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 fifteen months. As
of July 3, 1999, the Company has completed all of its Y2K efforts in the areas
described above with two minor exceptions involving our internal systems.
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 might require a
service update in order to achieve Y2K compliant status.
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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 the Company 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.
The Company'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. As of July 3, 1999 all internal systems have been
reviewed and evaluated. Except for the two minor items noted above, all
internal systems are now Y2K compliant. The remaining items will be upgraded
within the next 60 days. 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 has reviewed
each key supplier and service provider's Y2K readiness based on its formal
response to a TCC Y2K status request. As a result the Company does not
foresee any disruption in the flow of goods and services. This process is
ongoing and is expected to continue into the year 2000.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
As of July 3, 1999, the Company has incurred expenses related to the year
2000 problem of approximately $58,000. The main portion of these costs
relates to the evaluation and testing of products for Y2K compliance. The
Company anticipates additional costs of approximately $5,000 in order to
complete the Y2K process. 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, including potential catastrophic failures due to loss of
electricity, security systems, heating systems, etc. Such action may include
the use of alternative sources of supply to support manufacturing and product
development.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 (SFAS 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
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on its financial condition or results of operations. In June 1999 FASB issued
Statement of Financial Accounting Standards No. 137 (SFAS 137), "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB Statement No. 133--an amendment of FASB Statement No. 133". This
Statement has delayed the effective date of SFAS 133 until fiscal years
beginning after June 15, 2000.
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. SFAS 131 is a disclosure related statement
and has no financial impact on the company. The Company currently has only
one segment and no additional disclosures are required.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $2,522,000 or 341% to $3,262,000 as of
July 3, 1999, from a balance of $740,000 at October 3, 1998. This increase
was primarily due to the proceeds from the sale of the investment in Visual
Networks, Inc. and the reduction of accounts receivable, which were partially
offset by operating losses, an increase in inventory, paying down the line of
credit and a reduction in current liabilities. The current ratio increased to
6.5:1 at July 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 July 3, 1999, the Company has 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 matures on May 1, 2000. Under
the terms of the line of credit agreement, the Company is required to comply
with certain loan covenants. As of July 3, 1999, the Company is compliant
with these covenants. Availability under the line of credit has been reduced
by approximately $100,000, as of July 3, 1999, as a result of standby letters
of credit. No other borrowings are outstanding against the line. In the prior
year during the nine months ended June 27, 1998, the Company borrowed
$2,750,000 under its line of credit.
On April 30, 1999, the above mentioned line of credit was renewed. An
additional covenant was added, which restricts 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.
Item 3. Quantitative and Qualitative Disclosures about 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 July 3, 1999 would not have a material impact
on the book value of the Company's stockholders' equity.
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 Superior Court of the Commonwealth of
Massachusetts in 1999. This case arises from disputes concerning the hiring
and termination of Roland Gerard, former president of the Company. The
Complaint alleges state law claims for breach of contract, wrongful
termination, and civil conspiracy. The Company intends to file a motion to
dismiss in the near future. 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. An earlier complaint brought by Mr. Gerard in
the Federal court, which included the state claims, and a federal securities
claim was dismissed in July 1999; the securities claims were dismissed with
prejudice.
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)
August 13, 1999 By: /S/ CARL H. GUILD, JR.
- --------------- --------------------------------
Date Carl H. Guild, Jr., President
and Chief Executive Officer
August 13, 1999 By: /S/ MICHAEL P. MALONE
- --------------- --------------------------------
Date Michael P. Malone, Director of
Finance and Principal Financial
Officer
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<PERIOD-START> APR-04-1999
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