<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
October 3, 1998 0-8588
Or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_______________TO_______________.
TECHNICAL COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2295040
(State or other jurisdiction of (I..R.S. Employer Identification No.)
incorporation 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)
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.
Based on the closing price of the stock as of December 11, 1998, 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 11, 1998, was
approximately $7,000,000.
The number of shares of the registrant's Common Stock, par value $ .10
per share, outstanding as of December 11, 1998, was 1,294,541.
<PAGE>
FORWARD-LOOKING STATEMENTS
NOTE: THE DISCUSSIONS IN THIS FORM 10-K/A, 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 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 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/A FOR FISCAL YEAR
ENDED OCTOBER 3, 1998.
This Amendment No. 1 on Form 10-K/A amends and restates the Report of
Independent Public Accountants on the Financial Statements of the Company, as
filed under Item 14 of the Annual Report on Form 10-K filed with the Securities
and Exchange Commission on December 21, 1998 by Technical Communications
Corporation., for the purpose of correcting a typographical error which resulted
in the inadvertent omission of the conformed signature of the independent public
accountants. In addition this Form 10-K/A also amends and restates the
Management 's Discussion and Analysis of Financial Condition and Results of
Operations as filed under Item 7, for the purpose of including a discussion on
the Company's Market Risk as required under Item 305 of Regulation S-K.
<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/A, 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/A, for the fiscal year ended October 3, 1998.
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 eight 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 are expected to be complete by the end
of January 1999. To facilitate the plan, the Company has appointed a program
manager to oversee all Y2K initiatives.
Technical Communications Corporation has tested approximately 90% of
its products for Y2K problems to date. 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 20th and
21st 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.
<PAGE>
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 is
approximately 80% complete. The Company's enterprise information system, which
includes manufacturing, financial accounting and sales administration, is now
Y2K compliant. Supporting systems will continue to be tested and evaluated. 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 October 3, 1998, the Company has incurred expenses related to
the Y2K problem of approximately $25,000. The main portion of these costs
relates to the evaluation and testing of products for Y2K compliance. The
Company anticipates additional costs ranging from $45,000 - $110,000 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 Y2K
compliance.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES
Based on current information, the Company believes that the Y2K
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 Y2K 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>
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
Consolidated net sales for the year ended October 3, 1998, were
$13,855,781 compared with sales of $12,258,638 for the prior fiscal year. This
increase of $1,597,143, or 13.0%, is mainly attributed to shipment of a large
order for encryption equipment to a foreign customer.
Foreign sales increased by $2,700,374, or 28.4%, to $12,224,322,
primarily due to the aforementioned sale. On the other hand, domestic sales
decreased $1,103,231, or 40.3%, to $1,631,459; the decrease is predominantly due
to continued procurement reductions by U. S. government agencies.
Gross profit for fiscal year 1998 was $8,393,173, compared to
$7,104,975 in fiscal 1997, an increase of 18.1%. Gross profit expressed as a
percentage of sales was 61% in fiscal 1998 compared to 58% in the prior year,
which was primarily due to improved product mix and tighter cost controls.
Engineering, design and product development costs in fiscal 1998 were
$1,414,746, compared to $2,378,564 in fiscal 1997. The $ 963,818, or 40.5%,
decrease is attributable in part to charging more support engineering costs
directly to the aforementioned customized systems orders and the capitalization
of certain software development costs related to the Company's KEYNET 2 product.
In addition, outside product development costs were sharply reduced by focusing
engineering design developments on selected products and by bringing most of
these efforts in house.
Selling, general and administrative expenses decreased slightly from
$6,282,108 in fiscal 1997 to $6,220,992 for the year just ended, primarily due
to significantly lower marketing and business development expenditures
reflecting more realistic new product introduction schedules, largely offset by
increased sales support costs and higher legal expenses related to the
aforementioned litigations.
Investment income earned during fiscal 1998 was $24,068, compared to
$128,722 in fiscal 1997. The decrease was largely the result of increased
working capital requirements associated with the aforementioned large foreign
contract, which was not shipped until the fourth quarter of fiscal 1998.
The Company attained a net profit of $481,603, or $.37 per diluted
share during fiscal 1998, compared to a net loss of $1,243,501, or $.98 per
share during fiscal 1997. The improvement in fiscal 1998 profitability was a
result of an improved mix of higher margin foreign sales combined with
reductions in fixed expense, particularly in internal product development.
The effects of inflation and changing costs have not had a significant
impact on sales or earnings in recent years. As of October 3, 1998, none of
the Company's monetary assets or liabilities were subject to foreign exchange
risks. The Company usually includes an inflation factor in its pricing when
negotiating multi-year contracts with customers.
<PAGE>
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 is 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.
Selling, general and administrative expenses increased by $699,555
from $5,582,553 in fiscal 1996 to $6,282,108 for fiscal 1997. 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.
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 $.41 per diluted
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.
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. A 10% decrease in the fiscal year-end 1998 market equity prices would
result in a negative impact of $90,080 on the book value of the Company's
stockholders' equity. The investment is more fully described in Note 18 of the
Notes to Consolidated Financial Statements in the Company's 1998 Annual Report.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased from $1,876,748 at September 27,
1997 to $740,049 at October 3, 1998. This decrease was primarily due to
increased accounts receivable associated with a $7.4 million sale which was
essentially completed during the fourth quarter of fiscal 1998. The current
ratio of the Company decreased from 3.5 to 1 as of September 27, 1997 to 2.5 to
1 as of October 3, 1998. This decrease was primarily caused by a $2,250,000
increase in borrowings against the Company's line of credit which relates
directly to a build up of working capital associated with the aforementioned
$7.4 million sale.
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, 1998, the Company and its bank increased its
existing Revolving Line of Credit Agreement from $3,500,000 to $5,000,000. This
line of credit is available until May 1, 1999. 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 Company's assets
and is used for working capital requirements and to support
<PAGE>
letters of credit. During fiscal 1998, the Company borrowed $4,500,000 against
this credit line in order to accommodate additional working capital requirements
in conjunction with a $7.4 million sale which was substantially completed during
the fourth quarter of FY 1998. $2,250,000 of the amount borrowed was repaid
during fiscal 1998, reducing the outstanding borrowings at October 3, 1998 to
$2,250,000. Availability under the line of credit as of October 3, 1998 has
been further reduced by $911,526 for outstanding letters of credit. During the
first week of October 1998, the Company repaid the entire outstanding amount
upon receipt of payment in full of the outstanding receivable balance on the
$7.4 million sale. As of December 11, 1998, no borrowings were outstanding
under the line of credit.
In connection with the acquisition of the assets of Datotek, Inc., a
subsidiary of AT & T Corp., in May 1995, the Company entered into a reseller
agreement whereby it would commit to purchasing minimum annual levels of various
AT & T Secure Communications System's (now General Dynamics) products, in
exchange for exclusive distribution rights. This agreement, as modified in
October 1997, would have required the Company to purchase $850,000 and
$1,000,000 for the years ended September 30, 1998 and September 30, 1999
respectively.
On December 8, 1998, the Company entered into a new agreement with
General Dynamics (Addendum No. 5) which replaced the previous agreement. Under
terms of this agreement, the Company will: a) purchase selected General
Dynamics inventory at General Dynamics' cost of $1.1 million during Fiscal 1999;
b) receive expanded distribution rights for the United States, Canada and
Europe, areas previously excluded from the agreement by General Dynamics; and c)
assume responsibility for certain product warranties granted by General Dynamics
on sales within the U.S., Canadian and European territories. Most of the
affected products were sold by General Dynamics during 1998 under one year
warranties scheduled to expire during 1999, although there are a small number of
extended warranty products with expiration dates in 2000. The Company does not
believe that its total warranty exposure is material. The Company does not
believe that its obligations under this Agreement will materially adversely
impact its liquidity or operations. Although no assurances can be given that
certain purchased products will not eventually become technologically obsolete,
the Company believes that the selected product inventory that will be purchased
from General Dynamics can either be sold to certain foreign customers of the
Company or to new customers in the expanded distribution territories of the
U.S., Canada and Europe in the forseeable future.
In connection with the litigation set forth in Item 3 above, the
Company has agreed to reimburse members of the 13D Group $395,000 ($300,000
payable in the first quarter of fiscal 1999; $50,000 payable before the end of
fiscal 1999; and $45,000 payable before the end of fiscal 2000) and incurred
approximately $300,000 in additional legal fees related to its defense of this
litigation in fiscal 1998. The Company has made and expects to make such
future payments from available working capital.
<PAGE>
PART IV
Item 14 EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
[a] (1) The following Consolidated Financial Statements, Notes thereto and
Independent Auditors'Report of the Company are filed on the pages
listed below, as part of Part II, Item 8 of this report:
Page
Consolidated Balance Sheets for the Years Ended
October 3, 1998 and September 27, 1997 F-1
Consolidated Statements of Operations for the Years
Ended October 3, 1998, September 27, 1997 and
September 28, 1996 F-2
Consolidated Statements of Cash Flows for the Years
Ended October 3, 1998, September 27, 1997 and
September 28, 1996 F-3
Consolidated Statements of Stockholders' Equity for
the Years Ended October 3, 1998, September 27, 1997
and September 28, 1996 F-4
Notes to Consolidated Financial Statements F-5-F-18
Report of Independent Auditors F-19
[a] (2) The following Consolidated Financial Statement Schedule is included
herein:
Schedule II - Valuation Accounts and Report
of Independent Auditors F-20
(a) 3 LIST OF EXHIBITS
3.3 (a)* Articles of Organization of the Company
3.3 (b)** By-laws of the Company
10.1 Employment Agreement for Carl H. Guild, Jr.
10.2 Standstill Agreement
21 List of Subsidiaries of the Company
27.1 Financial Data Schedule
- - * Incorporated by reference to previous filings with the Commission
- -
- - ** Incorporated by reference to the Company's 8-K filed on May 5, 1998.
(b) REPORTS ON FORM 8-K
During the fourth quarter of fiscal 1998, Technical Communications
Corporation made four (4) filings on Form(s) 8-K. Current Reports
on Form(s) 8-K were filed with the Securities and Exchange Commission
on July 9, 1998, on July 16, 1998, on August 14, 1998 and on
August 27, 1998. In all cases, Item 5 was reported.
<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/ Carl H. Guild, Jr.
-----------------------
Carl H. Guild, Jr.
Chief Executive Officer and President
Vice Chairman of the Board
March 25, 1999
<PAGE>
CONSOLIDATED BALANCE SHEETS
OCTOBER 3, 1998, AND SEPTEMBER 27, 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................................ $ 740,049 $ 1,876,748
Accounts receivable, less allowance for doubtful accounts
of $70,000 and $25,000......................................................... 8,196,296 3,259,549
Unbilled revenue................................................................. -- 198,038
Inventories (Note 3)............................................................. 3,119,291 3,423,979
Refundable income taxes (Note 7)................................................. 361,532 292,629
Deferred income taxes (Note 7)................................................... 499,521 830,382
Other current assets............................................................. 88,483 117,947
------------- -------------
Total current assets......................................................... 13,005,172 9,999,272
------------- -------------
Equipment and leasehold improvements (Note 16)..................................... 4,818,515 4,382,655
Less accumulated depreciation and amortization................................... 3,773,457 3,200,075
------------- -------------
Equipment and leasehold improvements--net.................................... 1,045,058 1,182,580
------------- -------------
Goodwill........................................................................... 1,614,131 1,614,131
Less accumulated amortization.................................................... 716,443 501,533
------------- -------------
Goodwill--net................................................................ 897,688 1,112,598
------------- -------------
Available for Sale Securities (Note 18)............................................ 900,800 250,800
Other assets....................................................................... 324,011 347,649
------------- -------------
$ 16,172,729 $ 12,892,899
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS'EQUITY
Current Liabilities:
Line of Credit (Note 6)............................................................ $ 2,250,000 $ --
Accounts payable................................................................. 302,742 861,633
Accrued liabilities:
Compensation and related expenses............................................ 401,596 290,093
Other (Note 4)............................................................... 2,241,434 1,693,269
------------- -------------
Total current liabilities.................................................... 5,195,772 2,844,995
------------- -------------
Other long-term liabilities (Notes 7 and 15)....................................... 456,356 537,858
Commitments and contingencies (Notes 11, 14, 15 and 20)
Stockholders' Equity:
Common stock--par value $.10 per share; authorized
3,500,000 shares, issued 1,283,238 shares
and 1,273,703 shares........................................................... 128,324 127,370
Treasury stock at cost, 30,678 shares and 10,000 shares
(Notes 6 and 17)............................................................... (241,861) (80,000)
Additional paid-in capital (Note 17)............................................. 1,266,197 1,526,110
ESOP deferred compensation (Notes 6 and 17)...................................... -- (527,772)
Unrealized gain on investment, net (Note 18)..................................... 422,000 --
Retained earnings................................................................ 8,945,941 8,464,338
------------- -------------
Total stockholders' equity................................................... 10,520,601 9,510,046
------------- -------------
$ 16,172,729 $ 12,892,899
------------- -------------
------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-1
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 3, 1998, SEPTEMBER 27, 1997, AND SEPTEMBER 28, 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net sales (Note 13)................................................. $ 13,855,781 12,258,638 $ 14,012,802
Cost of sales....................................................... 5,462,608 5,153,663 5,781,414
------------- ------------- -------------
Gross profit................................................ 8,393,173 7,104,975 8,231,388
------------- ------------- -------------
Operating expenses:
Selling, general and administrative expenses.................... 6,220,992 6,282,108 5,582,553
Product development costs....................................... 1,414,746 2,378,564 1,955,852
------------- ------------- -------------
Total operating expenses.................................... 7,635,738 8,660,672 7,538,405
------------- ------------- -------------
Operating profit (loss)..................................... 757,435 (1,555,697) 692,983
Other income (expense):
Investment income............................................... 24,068 128,722 239,142
Interest expense................................................ (142,056) (63,979) (243,472)
Other........................................................... 2,690 (167,047) 20,876
------------- ------------- -------------
Total other income (expense)................................ (115,298) (102,304) 16,546
------------- ------------- -------------
Income (loss) before income taxes................................... 642,137 (1,658,001) 709,529
Provision (benefit) for income taxes (Note 7)....................... 160,534 (414,500) 177,382
------------- ------------- -------------
Net income (loss)................................................... $ 481,603 $ (1,243,501) $ 532,147
------------- ------------- -------------
------------- ------------- -------------
Net income (loss) per common share (Notes 2 and 5)
Basic........................................................... $0.38 $(0.98) $0.42
Diluted......................................................... $0.37 $(0.98) $0.41
Weighted average common shares outstanding used in computation
(Notes 2 and 5)
Basic........................................................... 1,281,924 1,270,625 1,257,384
Diluted......................................................... 1,288,007 1,270,625 1,298,387
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 3, 1998, SEPTEMBER 27, 1997, AND SEPTEMBER 28, 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)...................................................... $ 481,603 $ (1,243,501) $ 532,147
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities:
Depreciation and amortization...................................... 873,642 911,331 882,905
Net loss on disposal of fixed assets............................... 20,000 192,425 --
Non-cash compensation.............................................. 18,263 -- --
Deferred income taxes.............................................. 9,907 (70,904) (427,077)
Compensation associated with ESOP.................................. -- 167,403 246,136
Changes in assets and liabilities:
(Increase) decrease in accounts receivable......................... (4,936,747) (40,425) 1,792,842
Decrease (increase) in unbilled revenue............................ 198,038 (198,038) --
Decrease (increase) in inventories................................. 304,688 (808,207) (187,944)
(Increase) decrease in refundable income taxes..................... (68,903) (292,629) 139,944
Decrease in other current assets................................... 29,464 81,175 143,634
Increase (decrease) in accounts payable and accrued liabilities.... 114,723 (277,086) 689,165
----------- ------------- ------------
Net cash (used) provided by operating activities............... (2,955,322) (1,578,456) 3,811,752
----------- ------------- ------------
INVESTING ACTIVITIES:
Additions to equipment and leasehold improvements.................. (511,423) (533,177) (597,452)
Proceeds from disposal of equipment................................ -- 38,884 --
Cancellation of life insurance policies............................ 152,787 -- --
Long-term receivable............................................... 114,665 (104,841) --
Investment in capitalized software................................. (275,101) (34,104) (48,240)
Other assets....................................................... 1,500 (796) (7,900)
Cash paid for Datotek acquisition.................................. -- -- (44,511)
----------- ------------- ------------
Net cash (used) by investing activities........................ (517,572) (634,034) (698,103)
----------- ------------- ------------
FINANCING ACTIVITIES:
Exercise of stock options, including income tax benefits........... 88,689 53,387 85,723
Borrowings under line of credit.................................... 4,500,000 500,000 --
Payment of line of credit.......................................... (2,250,000) (500,000) --
Payment of debt.................................................... (2,494) (2,345,175) (696,136)
----------- ------------- ------------
Net cash provided (used) by financing activities............... 2,336,195 (2,291,788) (610,413)
----------- ------------- ------------
Net (decrease) increase in cash and cash equivalents............... (1,136,699) (4,504,278) 2,503,236
Cash and cash equivalents at beginning of year......................... 1,876,748 6,381,026 3,877,790
----------- ------------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................... $ 740,049 $ 1,876,748 $ 6,381,026
----------- ------------- ------------
----------- ------------- ------------
Supplemental disclosures:
Interest paid...................................................... $ 139,063 $ 70,991 $ 243,472
Income taxes paid (net of refunds received)........................ 108,765 408,193 103,497
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 3, 1998, SEPTEMBER 27, 1997, AND SEPTEMBER 28, 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Shares of Common Stock:
Beginning balance................................................. 1,273,703 1,264,496 1,254,426
Exercise of stock options......................................... 9,535 9,207 10,070
------------- ------------- -------------
Ending balance................................................ 1,283,238 1,273,703 1,264,496
------------- ------------- -------------
------------- ------------- -------------
Common Stock at par value:
Beginning balance................................................. $ 127,370 $ 126,450 $ 125,443
Exercise of stock options......................................... 954 920 1,007
------------- ------------- -------------
Ending balance................................................ 128,324 127,370 126,450
------------- ------------- -------------
Additional Paid-in Capital:
Beginning balance................................................. 1,526,110 1,473,643 1,388,927
Exercise of stock options......................................... 87,735 52,467 84,716
Termination of ESOP (Note 17)..................................... (347,648) -- --
------------- ------------- -------------
Ending balance................................................ 1,266,197 1,526,110 1,473,643
------------- ------------- -------------
ESOP Deferred Compensation:
Beginning balance................................................. (527,772) (695,175) (941,311)
Principal payments on ESOP debt (Note 6).......................... -- 167,403 246,136
Termination of ESOP (Note 17)..................................... 527,772 -- --
------------- ------------- -------------
Ending balance................................................ -- (527,772) (695,175)
------------- ------------- -------------
Unrealized Gain on Investment:
Beginning balance................................................. -- -- --
Available for sale investment (Note 18)........................... 422,000 -- --
------------- ------------- -------------
Ending balance................................................ 422,000 -- --
------------- ------------- -------------
Retained Earnings:
Beginning balance................................................. 8,464,338 9,707,839 9,175,692
Net income (loss)................................................. 481,603 (1,243,501) 532,147
------------- ------------- -------------
Ending balance................................................ 8,945,941 8,464,338 9,707,839
------------- ------------- -------------
Treasury Stock:
Beginning balance................................................. (80,000) (80,000) (80,000)
Termination of ESOP (Note 17)..................................... (180,124) -- --
Issuance of stock grants (Note 17)................................ 18,263 -- --
------------- ------------- -------------
Ending balance................................................ (241,861) (80,000) (80,000)
------------- ------------- -------------
Total stockholders' equity.......................................... $ 10,520,601 $ 9,510,046 $ 10,532,757
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) COMPANY OPERATIONS
Technical Communications Corporation, incorporated in 1961 in Massachusetts,
and its wholly-owned subsidiaries (the Company) operate in one industry segment:
the design, development, manufacture, distribution and sale of communications
security devices and systems.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, TCC Foreign Sales Corporation (FSC), a
qualified foreign sales corporation, 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. (Note 16)
CAPITALIZED SOFTWARE COSTS
The Company sells software as a component of its communications systems.
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 straight-line method, over three years.
As of October 3, 1998, the Company's aggregate investment in capitalized
software was $357,445 ($327,658 after accumulated amortization).
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets consist primarily of the costs of goodwill, patents and
trademarks purchased in business acquisitions. Intangible assets are amortized
on a straight-line basis over either 7 1/2 years or an estimated useful life,
whichever is shorter. The Company accounts for long-lived and intangible assets
in accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of".
The Company acquired substantially all of the assets of Datotek, Inc. in May
1995; the acquisition was accounted for as a purchase and, accordingly, an
allocation of purchase cost to the Company's assets and liabilities was made to
reflect fair values. The allocation resulted in unallocated excess purchase cost
over net assets acquired (goodwill) of $1,614,131, which is being amortized on a
straight-line basis over 7 1/2 years.
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. In 1998, the Company recorded a significant
amount of deferred revenue due to customer billings in excess of the revenue
recognized under the percentage of completion accounting 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.
RECLASSIFICATION
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the 1998 presentation.
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 bases of assets and liabilities.
WARRANTY COSTS
The Company provides for warranty costs at the time of sale based upon
actual experience.
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.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
a.) Cash and Cash Equivalents, Accounts Receivable and Accounts Payable--The
carrying amount of these assets and liabilities on the Company's
consolidated balance sheet approximates their fair value because of the
short maturity of these instruments.
b) Available for Sale Investment--The carrying amount of this asset on the
Company's consolidated balance sheet equals fair market value based on
market valuation.
c.) Line of Credit--The carrying amount of this liability on the Company's
consolidated balance sheet approximates its fair value because of the short
maturity of this instrument.
EARNINGS PER SHARE
At the beginning of fiscal year 1998, the Company adopted 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 (Note 5). As a result, all prior period
EPS data has been restated to conform with the provisions of this statement,
which includes the presentation of both a "Basic" and a "Diluted" EPS. Basic EPS
has been computed by dividing net income by a weighted average number of shares
of common stock outstanding during the period. In computing diluted EPS, only
stock options that are dilutive--those that reduce earnings per share--have been
calculated in the calculation of EPS using the Treasury Stock Method. Exercise
of outstanding stock options is not assumed if the result would be antidilutive,
such as when a net loss is reported for the period or the option exercise price
is greater than the average market price for the period presented.
AVAILABLE FOR SALE INVESTMENT
Pursuant to Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", the Company's
investments in marketable equity securities are accounted for at market value,
with the difference between cost and market value, net of related tax effects,
recorded currently to stockholders equity as "Net Unrealized Gain on Available
for Sale Investment" (Note 18).
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 other-wise decided by its Board of
Directors. The year ended October 3, 1998, included 53 weeks, while the years
1997 and 1996 ended on September 27, 1997 and September 28, 1996 each included
52 weeks.
NEWLY ISSUED PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income" and Statement of Financial Accounting Standards No. 131 (SFAS 131),
"Disclosures About Segments of an Enterprise and Related Information". SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components. SFAS 131 establishes 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 Statements are
effective for fiscal years beginning
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
after December 15, 1997. The Company does not believe that the adoption of these
Statements will have a material effect on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board 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. SFAS
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, based upon current business
practices.
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27,
1998 1997
------------ -------------
<S> <C> <C>
Finished goods............................................................. $ 173,141 $ 64,781
Work in process............................................................ 776,047 1,220,152
Raw materials and supplies................................................. 2,170,103 2,139,046
------------ -------------
Total inventories.......................................................... $ 3,119,291 $ 3,423,979
------------ -------------
------------ -------------
</TABLE>
(4) OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27,
1998 1997
------------ -------------
<S> <C> <C>
Reserve for product warranty............................................... $ 167,772 $ 163,480
Customer advance payments.................................................. 83,885 149,011
Sales representative commissions........................................... 135,514 746,833
Deferred revenues.......................................................... 447,375 --
Customer support agreements................................................ 914,585 519,839
Income taxes payable....................................................... 289,513 --
Other...................................................................... 202,790 114,106
------------ -------------
Total accrued liabilities.................................................. $ 2,241,434 $ 1,693,269
------------ -------------
------------ -------------
</TABLE>
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) EARNINGS PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share", basic and diluted EPS
were calculated as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ------------- ----------
<S> <C> <C> <C>
BASIC NET INCOME/(LOSS)............................................. $ 481,603 $ (1,243,501) $ 532,147
---------- ------------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING................................. 1,281,924 1,270,625 1,257,384
Outstanding dilutive stock options with option price less than
average market price.............................................. 6,083 -- 41,003
---------- ------------- ----------
ADJUSTED WEIGHTED AVERAGE SHARES.................................... 1,288,007 1,270,625 1,298,387
---------- ------------- ----------
BASIC EARNINGS PER SHARE............................................ $0.38 $(0.98) $0.42
---------- ------------- ----------
---------- ------------- ----------
DILUTED EARNINGS PER SHARE.......................................... $0.37 $(0.98) $0.41
---------- ------------- ----------
---------- ------------- ----------
</TABLE>
Outstanding potentially dilutive stock options which were not included in
the above calculations for the respective fiscal years were as follows: 138,316
in 1998; 261,155 in 1997; and 192,902 in 1996.
(6) DEBT
At October 3, 1998, the Company had a $5,000,000 line of credit (increased
from $3,500,000 on May 1, 1998) at a rate of prime plus 1/2 of 1% (8.75% at
October 3, 1998). Availability under the line of credit has been reduced by
$911,526 for outstanding standby letters of credit (see Note 11). During the
twelve months ended October 3, 1998, the Company borrowed $4,500,000 against its
credit line in order to accommodate additional working capital requirements in
conjunction with a $7.4 million sale which was substantially completed during
the final quarter of fiscal 1998. The Company repaid $2,250,000 during the year,
reducing the outstanding indebtedness to $2,250,000 at the end of fiscal 1998.
On October 8, 1998, the Company repaid the entire amount borrowed following
receipt of payment in full of the outstanding receivable balance on the $7.4
million sale.
Other than outstanding standby letters of credit, the Company had no
borrowings under the line of credit in 1997 or 1996. This line of credit is
secured by a pledge of substantially all the assets of the Company. This line of
credit expires on May 1, 1999, unless renewed.
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. 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, required equal monthly payments of principal of $3,446, commencing
on May 31, 1997. On August 28, 1997, the Company provided a second loan of
$472,222 to the Trust in order to pay off the 1991 bank loan. This second
Company loan to the Trust bore interest at 13.6% per annum and required equal
monthly principal payments of $9,838 beginning on September 28, 1997.
At its August 27, 1997 meeting, the Board of Directors voted to terminate
the Employee Stock Ownership Plan effective October 1, 1997. Actual termination
of the Company's ESOP was effected in
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) DEBT (CONTINUED)
fiscal 1998 by transferring all remaining shares that had not been allocated to
participants to Treasury Stock (Note 17).
The Company made contributions to the Trust equal to the monthly payment of
principal and interest on the ESOP loans as they became due. Because the payment
of principal resulted in the release of shares from collateral, which shares
were then available for allocation to employees, the principal portion of these
contributions was recorded as compensation expense. Such contributions were,
therefore, expensed to compensation and interest when they were made or accrued.
The compensation and interest elements are as follows:
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1996
---------- ------------- -------------
<S> <C> <C> <C>
Compensation................................................. $ -- $ 167,403 $ 246,136
Interest..................................................... -- 49,104 71,996
---------- ------------- -------------
Total contributions.......................................... $ -- $ 216,507 $ 318,132
---------- ------------- -------------
---------- ------------- -------------
</TABLE>
On May 31, 1995, the Company completed an asset purchase of the secure
communications business of Datotek, Inc., a subsidiary of AT&T Corp., for
$3,687,000. 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.
(7) INCOME TAXES
The provisions (credits) for income taxes consist of the following:
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1996
---------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal......................................................... $ 29,629 $ (294,024) $ 502,784
State........................................................... 26,706 113,495 132,028
---------- ------------- -------------
Total current taxes............................................... 56,335 (180,529) 634,812
---------- ------------- -------------
Deferred:
Federal......................................................... 111,641 (16,519) (365,442)
State........................................................... (7,442) (217,452) (91,988)
---------- ------------- -------------
Total deferred taxes.............................................. 104,199 (233,971) (457,430)
---------- ------------- -------------
Total provision (benefit)......................................... $ 160,534 $ (414,500) $ 177,382
---------- ------------- -------------
---------- ------------- -------------
</TABLE>
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES (CONTINUED)
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>
OCTOBER 3, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1996
---------- ------------- -------------
<S> <C> <C> <C>
Tax at U.S. statutory rate........................................ $ 220,210 $ (563,720) $ 241,240
Benefit of Foreign Sales Corp..................................... (74,269) -- (23,604)
State income taxes, net of Federal benefit........................ 12,714 (103,957) 28,260
Tax-exempt interest............................................... -- -- (6,875)
Other............................................................. 32,933 (17,912) 5,861
Increase (reduction) in valuation allowance....................... (31,054) 271,089 (67,500)
---------- ------------- -------------
Total............................................................. $ 160,534 $ (414,500) $ 177,382
---------- ------------- -------------
---------- ------------- -------------
</TABLE>
Deferred income taxes consist of the following:
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27,
1998 1997
------------ -------------
<S> <C> <C>
NOL carryforward................................................................ $ -- $ 543,891
FAS 115 investment.............................................................. (228,000) --
Goodwill........................................................................ 126,671 88,823
Inventory reserve............................................................... 457,158 426,247
Warranty reserve................................................................ 67,562 98,237
Payroll related accruals........................................................ 476,082 144,589
Other........................................................................... 193,914 153,515
------------ -------------
Total........................................................................... 1,093,387 1,455,302
Less: Valuation allowance....................................................... $ (593,866) $ (624,920)
------------ -------------
Total........................................................................... $ 499,521 $ 830,382
------------ -------------
------------ -------------
</TABLE>
The valuation allowance relates to uncertainty with respect to the Company's
ability to realize prepaid tax assets.
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.
(8) 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
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) STOCK OPTIONS (CONTINUED)
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 1996 through 1998 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>
OCTOBER 3, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1996
---------- ------------- -------------
<S> <C> <C> <C>
Net Income (loss)
As reported..................................................... $ 481,603 $(1,243,501) $ 532,147
Pro forma....................................................... $ 296,646 $(1,432,295) $ 376,293
Basic Earnings per common share
As reported..................................................... $0.38 $(0.98) $0.42
Pro forma....................................................... $0.26 $(1.23 ) $0.31
</TABLE>
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to September 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 4.08%, 6.00%, and 6.43% for 1998, 1997,
and 1996, respectively, expected life equal to each grant's vesting period (1 to
10 years), expected volatility of 100%, and an expected dividend yield of 0%.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) STOCK OPTIONS (CONTINUED)
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ -----------
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF
SHARES PRICE SHARES PRICE SHARES
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Options outstanding, beginning of year.................. 261,155 $ 10.14 233,905 $ 10.13 167,550
Options granted
Option Price = Fair Market Value...................... 106,369 $ 6.58 34,700 $ 9.33 46,950
Option Price > Fair Market Value...................... -- -- 16,000 $ 11.45 50,000
Options exercised....................................... (3,100) $ 4.00 (7,500) $ 6.90 (10,070)
Options forfeited....................................... (220,025) $ 9.57 (15,950) $ 10.92 (20,525)
----------- ----------- -----------
Options outstanding, end of year........................ 144,399 $ 8.58 261,155 $ 10.14 233,905
Options exercisable..................................... 69,029 $ 8.12 72,965 $ 9.50 51,470
Weighted average fair value per share of options granted
during the year....................................... $ 4.65 $ 7.76
<CAPTION>
AVERAGE
EXERCISE
PRICE
-----------
<S> <C>
Options outstanding, beginning of year.................. $ 10.24
Options granted
Option Price = Fair Market Value...................... $ 8.71
Option Price > Fair Market Value...................... $ 11.24
Options exercised....................................... $ 11.26
Options forfeited....................................... $ 11.03
Options outstanding, end of year........................ $ 10.13
Options exercisable..................................... $ 9.78
Weighted average fair value per share of options granted
during the year....................................... $ 6.77
</TABLE>
The following summarizes certain data for options outstanding at October 3,
1998;
<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:.......................... 78,619 $ 4.00-- $8.00 $ 5.97 9.36
55,670 $ 8.01--$12.00 $ 9.57 8.90
10,110 $ 12.01--$16.75 $ 13.61 10.20
-----------
144,399 $ 8.58 9.25
Options exercisable:....................................... 46,219 $ 4.00-- $8.00 $ 5.84
17,970 $ 8.01--$12.00 $ 9.56
4,840 $ 12.01--$16.75 $ 13.64
-----------
69,029 $ 8.12
</TABLE>
(9) 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 contributions was made
for 1997. However, the Board of Directors approved a corporate match of 25 cents
per dollar of the first 6% of each participant's contributions to the plan for
fiscal 1998 and elected to extend the 25 cents per dollar of the first 6%
throughout fiscal 1999. The Company contributed approximately $37,700 and
$46,000 in 1996 for the Company's contribution to the plan.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) 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. Bonuses of $104,500 were earned and accrued
in fiscal 1996 for key management employees, while no bonuses were earned and
accrued under the plan in either 1997 or 1998.
(11) OFF-BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
At October 3, 1998, and September 27, 1997, the Company was contingently
liable under open standby letters of credit totaling $911,526 and $839,158,
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 October 3, 1998, 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 receiv-ables are secured by letters of credit or foreign
credit insurance.
(12) RELATED PARTY TRANSACTIONS
During fiscal years 1997 and 1996, the Company incurred expenses of $116,038
and $96,360, respectively, with FutureComms, Inc., for telecommunications
software consulting services. FutureComms is owned and operated by Michelle D.
Gerard, the wife of the Company's President and CEO prior to his termination in
February, 1998. FutureComm's work ended in August, 1997.
Lawrence A. Kletter, Esq., who resigned as a director during fiscal 1997, is
a member of a law firm which provided legal services to the Company.
During 1996, the Company leased a sales office from Arnold McCalmont, former
Chairman of the Board; the lease payment for the year was $1.00. The fair value
of such rent was estimated at less than $5,000.
On November 19, 1998, the Company settled certain litigation as set forth in
Note 20 below.
On June 27, 1995, the Company invested $250,800 for a minority interest in
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 a distribution agreement with Net2Net that gave
TCC the exclusive right to sell Net2Net products to certain U.S. Government
departments. As of October 3, 1998, $144,283 of the inventory had been sold and
the remaining $99,917 has been either written down or fully reserved. On May 15,
1998, Visual Networks, Inc. ("Visual"), a public company, merged with and into
Net2Net. Under the terms of the merger, all outstanding shares of Net2Net were
exchanged for an aggregate of 2,250,000 shares of Visual common stock. Pursuant
to an Escrow Agreement by State Street Bank & Trust Company to indemnify and
hold Visual and the Merger Subsidiary harmless from the breach of default of
representations, warranties, covenants and agreements given or made by Net2Net,
seven and one-half percent (7.5%) of the aggregate number of shares of Visual
Common Stock issued to Net2Net stockholders in connection with the merger are
being held in escrow until the earlier of (i) three business days after the
delivery by Visual's independent certified public accountants of its reports for
the fiscal year ended December 31, 1998 and (ii) the close of business on March
31, 1999. Pursuant to a Registration Rights Agreement, Visual has agreed to file
a registration
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) RELATED PARTY TRANSACTIONS (CONTINUED)
statement covering the shares of Visual Common Stock issued in the Merger by no
later than one month after March 1, 1999. Until this registration has been
completed, Visual shares are considered restricted, in that they may not be
transferred or resold except as permitted under the Securities Act of 1933.
Net2Net's President was Stephen McCalmont, son of Arnold McCalmont, a former
director and former Chairman of Technical Communications Corporation, and
brother of James McCalmont, another former Director of the Company. Both of
these gentlemen, in addition to Herbert A. Lerner, a former director and former
Treasurer of the Company, were also investors in Net2Net Corporation. This
investment, which represents less than a 5% interest, was accounted for using
the cost method; however, under Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", the Company's investment in Visual securities is now accounted for
at market value (Note 18).
(13) MAJOR CUSTOMERS AND EXPORT SALES
In fiscal 1998, the Company had two customers representing 71% (54% and 17%)
of net sales. In fiscal 1997, the Company had three customers, including the
U.S. Government as one customer, representing 51% (25%, 13%, and 13%) of net
sales. In fiscal 1996, the Company had three customers, including the U.S.
Government, representing 54% (26%, 16%, and 12%) of net sales.
A breakdown of net sales is as follows:
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Domestic....................................................... $ 1,631,459 $ 2,734,690 $ 3,633,425
Foreign........................................................ $ 12,224,322 $ 9,523,948 $ 10,379,377
------------- ------------- -------------
Total Sales.................................................... $ 13,855,781 $ 12,258,638 $ 14,012,802
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
A summary of foreign sales by geographic area follows:
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1996
------------- ----------------- -----------------
<S> <C> <C> <C>
North America
(excluding the U.S.)............................................. 0.1% 1.0% 1.3%
Central and South America.......................................... 5.0% 33.8% 6.7%
Europe............................................................. 4.2% 6.1% 11.6%
Mid-East and Africa................................................ 84.4% 53.8% 46.0%
Far East........................................................... 6.3% 5.3% 34.4%
</TABLE>
(14) COMMITMENTS AND CONTINGENCIES
The Company is the defendant in GERARD V. TECHNICAL COMMUNICATIONS
CORPORATION, ET AL., filed in United States District 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
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) COMMITMENTS AND CONTINGENCIES (CONTINUED)
early stage of the litigation, it is impossible to determine the ultimate
outcome. The Company is determined to contest this suit vigorously.
The Company is also party to various claims arising in the normal course of
business. Management believes that these are adequately provided for or will not
result in a significant additional liability to the Company.
(15) 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, 1998, 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 $155,300 in fiscal year 1998 and $146,160 per year
for fiscal years 1996 and 1997.
On April 6, 1998, the Company entered into a capital lease for computer
equipment valued and recorded at $20,370 ($17,876 after accumulated
depreciation) which is included in the Engineering and Manufacturing Equipment
category of the Company's equipment and leasehold improvements. The lease term
is for three years and contains a bargain purchase option which may be exercised
upon lease expiration. Minimum annual principal payments over the next three
years are: $6,404 in 1999; $7,043 in 2000; and $4,429 in 2001.
(16) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
OCTOBER 3, SEPTEMBER 27, ESTIMATED
1998 1997 USEFUL
------------ ------------- ----------
<S> <C> <C> <C>
Engineering and manufacturing equipment............................ $ 2,221,594 $ 1,920,289 3-8 years
Demonstration equipment............................................ 1,058,550 922,696 3-5 years
Furniture and fixtures............................................. 1,079,569 1,036,423 3-8 years
Automobiles........................................................ 44,335 89,899 5 years
Leasehold improvements............................................. 414,467 413,348 2-5 years
------------ ------------- ----------
Total equipment and leasehold improvements......................... $ 4,818,515 $ 4,382,655 2-8 years
------------ ------------- ----------
------------ ------------- ----------
</TABLE>
(17) TREASURY STOCK TRANSACTIONS
Following termination of its ESOP on October 1, 1997 (Note 6), the Company
accounted for the termination in the manner specified in AICPA Statement of
Position (SOP) 93-6, EMPLOYERS' ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS,
paragraph 38. Specifically, the Company transferred the remaining 23,543 shares
that had not been allocated to participants to Treasury Stock and valued the
transaction at the fair market value of the shares at the October 1, 1997
reacquisition date. Unearned ESOP shares were credited for the cost of the
shares, zeroing out the balance remaining in the Deferred Compensation liability
contra account, and the difference was recognized in Additional Paid in Capital.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) TREASURY STOCK TRANSACTIONS (CONTINUED)
On August 14, 1998, 2,865 shares of Technical Communications Corporation
Common Stock were granted to members of the Company's Board of Directors at a
price per share of $6.38, which was equal to current market value on date of
grant. These shares were issued from the Company's Treasury Stock.
(18) AVAILABLE-FOR-SALE INVESTMENT
The Company's investment in Visual Network's Common Stock following the
merger of Net2Net into Visual Networks, Inc. on May 15, 1998 (Note 12), although
restricted pending the filing of a registration statement by Visual in March,
1999, is considered an available-for-sale investment in the accompanying balance
sheet and is carried at market value. At October 3, 1998, the market value of
this investment was $900,800, giving rise to an unrealized gain of $650,000
($422,000 net of tax effects) when compared to the $250,800 cost.
(19) RISKS
The Company is exposed to a number of business risks. These include, but are
not limited to, concentration of its business among a relatively small number of
customers (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.
(20) SUBSEQUENT EVENTS
On November 19, 1998, the Company reached agreement on and subsequently
announced the settlement of shareholder litigation initiated by Philip Phalon
and Dr. Mahmud Awan, which had been pending in Middlesex County, Massachusetts
Superior Court since February 1998. The settlement agreement and standstill
agreement executed by the Company and members of the opposition group that had
filed a Form 13D (the "13D Group") in the settlement of the above described
litigation set forth mutual full releases as to the litigation and also include
provisions requiring (i) the Company to reimburse the 13D Group's expenses in
payments aggregating $395,000 ($300,000 expensed and payable in the first
quarter of fiscal 1999; $50,000 payable before the end of fiscal 1999; and
$45,000 payable before the end of fiscal 2000), (ii) the dissolution of the 13D
Group (Note: Members of the 13D Group plan to file an amendment to their Form
13D dissolving the 13D Group in either December 1998 or January 1999.), and
(iii) the former proxy contestants to abide by certain standstill provisions
until October 1, 2000.
On November 19, 1998, Carl H. Guild, Jr., the Company's Chief Executive
Officer and President, was granted warrants to purchase 100,000 shares of the
Company's Common Stock under the 1991 Stock Option Plan. These options are all
at a price of $4.00 per share, equal to fair market value at date of grant, and
are exercisable as follows: (i) 60,000 shares became exercisable on November 19,
1998; (ii) 20,000 are exercisable on June 30, 1999; and 20,000 are exercisable
on September 30, 1999.
On December 8, 1998, the Company entered into a new agreement with General
Dynamics (Addendum No. 5) which replaced the previous minimum purchase agreement
for AT&T Secure Communications Systems products. Under terms of this agreement,
the Company will: a) purchase selected General Dynamics inventory at General
Dynamics' cost of $1.1 million during Fiscal 1999; b) receive expanded
distribution rights for the United States and Europe, areas previously excluded
from the agreement by General Dynamics; and c) assume responsibility for certain
product warranties granted by General
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(20) SUBSEQUENT EVENTS (CONTINUED)
Dynamics on sales within the U. S. and European territories. Most of the
affected products were sold by General Dynamics during 1998 under one year
warranties scheduled to expire during 1999, although there are a small number of
extended warranty products with expiration dates in 2000. The Company does not
believe that its total warranty exposure is material. The Company does not
believe that its obligations under this Agreement will materially adversely
impact its liquidity or operations. Although no assurances can be given that
certain purchased products will not eventually become technologically obsolete,
the Company believes that the selected product inventory that will be purchased
from General Dynamics can either be sold to certain foreign customers of the
Company or to new customers in the expanded distribution territories of the U.S.
and Europe in the forseeable future.
(21) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
For the years ended October 3, 1998, and September 27, 1997.
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
FISCAL 1998 DECEMBER 27, 1997 MARCH 28, 1998 JUNE 27, 1998 OCTOBER 3, 1998
- -------------------------------------------------- ----------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Net sales......................................... $2,935,048 $3,405,457 $3,281,399 $4,233,877
Gross profit...................................... 1,363,962 2,110,584 2,123,894 2,794,733
Net (loss) income................................. (128,719) 178,142 222,415 209,765
Net (loss) income per share
Basic........................................... $(.10) $.14 $.17 $.16
Diluted......................................... $(.10) $.14 $.17 $.16
</TABLE>
<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
Basic........................................... $.03 $.09 $(.78) $(.32)
Diluted......................................... $.03 $.09 $(.78) $(.32)
</TABLE>
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Technical Communications Corporation:
We have audited the accompanying consolidated balance sheets of Technical
Communications Corporation (a Massachusetts corporation) and its subsidiaries as
of October 3, 1998, and September 27, 1997 and the related consolidated
statements of operations, cash flows, and stockholders' equity for the years
ended October 3, 1998, September 27, 1997 and September 28, 1996. 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 October 3, 1998 and September
27, 1997 and the results of their operations and their cash flows for the years
ended October 3, 1998, September 27, 1997 and September 28, 1996, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
October 30, 1998 (except for the matters discussed in Note 20, as to which the
date is December 8, 1998)
F-19
