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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(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 2, 1999 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
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2295040
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(State or other jurisdiction of (I..R.S. Employer
incorporation or organization) Identification No.)
100 DOMINO DRIVE, CONCORD, MA 01742-2892
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(Address of principal executive offices) (Zip code)
(978) 287-5100
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(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12 (b) of the Act:
NONE NONE
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(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
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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.
|X|
Based on the closing price of the stock as of December 17, 1999,
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 17, 1999, was
approximately $5,234,801.
The number of shares of the registrant's Common Stock, par value $
.10 per share, outstanding as of December 17, 1999, was 1,312,513.
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FORWARD-LOOKING STATEMENTS
NOTE: THE DISCUSSIONS IN THIS FORM 10-K, INCLUDING ANY DISCUSSION OF OR IMPACT,
EXPRESSED OR IMPLIED, ON TECHNICAL COMMUNICATIONS CORPORATION'S (THE COMPANY)
ANTICIPATED OPERATING RESULTS AND FUTURE EARNINGS, 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. THESE AND OTHER RISKS ARE DETAILED FROM TIME TO TIME IN THE COMPANY'S
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THIS FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 2, 1999.
PART I
Item 1. BUSINESS
(a) GENERAL
The Company was organized in 1961 as a Massachusetts corporation
to engage primarily in consulting activities. However, since the late 1960s its
business has consisted entirely of the design, development, manufacture,
distribution, marketing and sale of communications security devices and systems.
(b) INFORMATION AS TO INDUSTRY SEGMENTS
The Company's business consists of only one industry segment,
which is the design, development, manufacture, distribution, marketing and sale
of communications security devices and systems.
(c) DESCRIPTION OF BUSINESS
The Company's products consist of sophisticated electronic devices
which enable users to transmit information in an encrypted format and permit
receivers to reconstitute the information in a deciphered format. The Company's
products can be used to protect confidentiality in communications between
radios, telephones, facsimile machines and data processing equipment over wires,
fiber optic cables, radio waves and microwave and satellite links. A customer
may order and receive equipment, which is specially programmed to scramble
transmissions in accordance with a code to which only the customer has access.
The principal markets for the Company's products are financial institutions,
foreign and domestic governmental agencies, law enforcement agencies and
multinational companies requiring protection of mission-critical information.
(d) PRODUCTS
Products currently available or under development provide
communications security solutions for mission-critical networks, voice and
facsimile, centralized key and device management, and military ciphering
applications.
Government Systems
The DSD 72A-SP High Speed Data Encryptor is a rugged military bulk
ciphering system that provides a maximum level of cryptographic security for
synchronous data networks operating at up to 34 Mbps. The product supports a
wide variety of interfaces and easily integrates into existing networks.
Reliable secure communication is ensured with crypto synchronization methods
built to maintain connections in error and jamming environments such as radio
relay networks, missile systems and microwave systems.
The DSP 9000 Narrowband Radio Security family of products provide
strategic security for voice and data communications sent over HF, VHF and UHF
channels in full and half-duplex modes. Designed for rugged military
environments, the DSP 9000 provides exceptional voice quality over poor line
connections making it an ideal security solution for military aircraft, naval,
base station and manpack radio
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applications. The product provides automated key management for optimum security
and ease of use. It is also radio independent because software programmable
interfaces allow radio interface levels to be changed without configuring the
hardware. Base station, handset and implant board configurations are available
options with the DSP 9000. Additionally, the DSP 9000 is compatible with the
Company's CSD 3324E secure telephone to enable "office-to-field" communications.
The CSD 3324, Secure Fax and Data system protects telephone, fax
and data communications even over degraded line conditions. This product is
designed to be a perfect solution for government or military officials based in
remote locations.
Secure Office Systems
The CSD 3600 Secure Portable Telephone Attachment may be placed
between any telephone and handset worldwide to provide high-end digital
security. Small and portable, the CSD 3600 operates over both digital and analog
telephone lines, and is designed to ensure protection through new and unique
random keys negotiated with each communication session.
The CSD 3700 Fax Security System is a highly secure, automatic
transmission fax system that connects to any Group 3-fax machine via a 2-wire
interface. Security protection is achieved with Diffie-Hellman negotiated key
technology and randomly generated keys that are unique to each communication
session. Open and closed networks are supported by the CSD 3700 to enable an
open exchange of secure documents in the industrial marketplace or restrict
secure communications to only authorized parties in highly confidential or
government applications.
The 4100 Executive Secure Telephone offers strategic level voice
and data security in a full-featured executive telephone package. Exceptional
voice quality is achieved with three different voice-coding algorithms. The
product supports multiple security layers such as automated key management,
authentication, certification and access control. Video and telephone
conferencing options are also available.
Network Security Systems
The CipherONE-TM- family of Network Security Systems is a
family of high-speed, high-performance hardware/software-based encryption
products for LAN/WAN and Internet applications and includes Network Security
Management.
All of the systems have been designed for complete node-to-node
protection and therefore provide node authentication and access control, as well
as data integrity. This family of products also utilizes a modular architecture
that permits the software to be updated as networks migrate to emerging
protocols, thereby protecting the user's investment. Network transparent, the
products support U.S. Government-backed Triple DES and proprietary encryption
algorithms as well as ANSI X9.52 and public key management. Specific products
within this family support Frame Relay, Internet (IP) and X.25 protocols.
The Cipher C 7100 Frame Relay Network Encryptor is a high-speed
end to end frame relay encryption system and is easily configured locally with
Cipher Site Manager or remotely with KEYNET.
The Cipher C 7200 IP Network Encryptor provides encryption
security at the Internet Protocol (IP) layer and is easily configured locally
with Cipher Site Manager or remotely with KEYNET.
KEYNET Network Security Management is a Windows NT-based key and
security device management system that can centrally and simultaneously manage
an entire CipherONE Security Systems Network, including those on mixed networks
such as Frame Relay and IP. KEYNET has an intuitive graphical user interface
(GUI), making it very easy to use. The system securely generates, distributes
and exchanges keys, sets address tables, provides diagnostics and performs
automatic polling and alarms from a central and remote location. KEYNET also
operates with SNMP-based management systems for ease-of-use and provides instant
alarm notification. These high security measures facilitate central management
while maintaining optimum security for mission-critical networks worldwide.
(e) COMPETITION
The Company has several competitors, including foreign-based
companies, in the communications security device field. Few of these competitors
offer products that compete across all of the Company's product offerings and
none are believed to have a dominant share of the market. Many of these
competitors, however, are companies, which may have greater financial and other
resources than the Company. The Company believes its principal competitors
include Crypto AG, Racal Datacom Inc., Cylink Corporation, Motorola Inc.,
Omnisec AG, Cisco Systems, Information Resource Engineering Inc. and TimeStep
Corporation.
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The Company competes based on its service, the operational and
technical features of its products, its sales expertise and pricing. The Company
sells directly to customers, original equipment manufacturers and value-added
resellers, using its in-house sales force as well as domestic and international
representatives and distributors.
(f) SALES AND BACKLOG
In fiscal 1999, the Company had three customers, representing
60% (32%, 17% and 11%) of net 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, representing 51% (25%, 13% and 13%) of net sales.
The Company expects that sales to relatively few customers will
continue to account for a high percentage of the Company's revenues in any
accounting period in the foreseeable future. A reduction in orders from any such
customer, or the cancellation of any significant order and failure to replace
such order with orders from other customers, would have a material adverse
effect on the Company's business, financial condition, and results of
operations.
The Company's backlog of firm orders as of October 2, 1999 was
$2,048,000, compared to $732,000 as of October 3, 1998. The Company expects to
deliver substantially all of its backlog in fiscal year 2000.
(g) REGULATORY MATTERS
As a party to a number of contracts with the U.S. Government
and its agencies, the Company must comply with extensive regulations with
respect to bid proposals and billing practices. Should the U.S. government or
its agencies conclude that the Company has not adhered to federal
regulations, any contracts to which the Company is a party could be canceled
and the Company could be prohibited from bidding on future contracts. Such a
prohibition would have a material adverse effect on the Company. All payments
to the Company for work performed on contracts with agencies of the U.S.
government are subject to adjustment upon audit by the U.S. government
Defense Contract Audit Agency, the General Accounting Office, and other
agencies. The Company could be required to return any payments received from
U.S. government agencies if it is found to have violated federal regulations.
In addition, U.S. government contracts may be canceled at any time by the
government with limited or no penalty. Contract awards are also subject to
funding approval from the U.S. government, which involves political,
budgetary and other considerations over which the Company has no control.
The Company's security products are subject to export restrictions
administered by the U.S. Department of Commerce, which licenses the export of
encryption products, subject to certain technical restrictions. In addition,
U.S. export laws prohibit the export of encryption products to a number of
hostile countries. Although to date the Company has been able to secure U.S.
export licenses, there can be no assurance that the Company will continue to be
able to secure such licenses in a timely manner in the future, or at all.
(h) MANUFACTURING AND TECHNICAL EXPERTISE
The Company subcontracts a large portion of its manufacturing
operations. Many of the components used in the Company's products are standard
components available from more than one supplier. The Company has, or believes
that it could develop without significant delay, alternative sources for almost
all materials and components used in the manufacture of its products. The
Company's internal manufacturing process consists primarily of adding critical
components, final assembly, quality control, testing and burn-in. Delivery time
varies depending on the products and options ordered.
The Company's technological expertise and experience, including
certain proprietary rights, which it has developed and maintains as trade
secrets, are crucial to the conduct of the Company's business. Management is of
the opinion that, while patent protection is desirable with respect to certain
of its products, none of the Company's patents are material to the conduct of
its business. Eight patents have been issued to the Company. The Company has a
number of trademarks for various products, including TCC, CipherONE and CIPHER
X. The Company does not deem any of its trademarks to be material to the conduct
of its business.
(i) RESEARCH AND DEVELOPMENT
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Research and development is undertaken by the Company on its own
initiative. In order to develop the technology needed to compete successfully,
the Company must attract and retain qualified personnel, improve existing
products and develop new products. No assurances can be given that the Company
will be able to hire, train and motivate such technical management and sales
personnel. During the twelve-month periods ended October 2, 1999, October 3,
1998 and September 27, 1997, the Company spent $1,935,859, $1,414,746, and
$2,378,564, respectively, on product development. In addition, product
development is undertaken by the Company on a contract specific basis; the
development costs associated with these contracts are included in cost of sales.
(j) EMPLOYEES
As of October 2, 1999, the Company employed 56 persons. The
Company believes that its relationship with its employees is good.
(k) FOREIGN OPERATIONS
The Company is dependent upon its foreign sales. Although foreign
sales were more profitable than domestic sales during fiscal years 1999 and 1998
because the mix of products sold abroad included more products with higher
profit margins than the mix of products sold domestically, this does not
represent a predictable trend. For example, during fiscal year 1996 foreign and
domestic sales were equally profitable. Sales to foreign markets have been and
will continue to be affected by the stability of foreign governments, economic
conditions, export and other governmental regulations, and changes in
technology. The Company attempts to minimize the financial risks normally
associated with foreign sales by utilizing letters of credit confirmed by U.S.
banks and by using foreign credit insurance. Foreign sales contracts are usually
in U.S. dollars.
The Company's export sales are conducted through its wholly owned
subsidiary, TCC Foreign Sales Corporation (TCC FSC) which is organized and
incorporated in the U.S. Virgin Islands. As a qualified Foreign Sales
Corporation under the Internal Revenue Code, TCC FSC is able to take advantage
of tax incentives enacted by Congress to encourage export sales.
Information regarding the Company's revenue from export sales for
the past five years is set forth in Item 6, "SELECTED FINANCIAL DATA".
Item 2. PROPERTIES
The Company leases its headquarters located in Concord,
Massachusetts, under an operating lease. The premises are used for manufacturing
and house the Company's executive offices.
On October 16, 1992, the Company signed its current lease on its
headquarters. The Company has exercised its option to extend this lease for the
first of two additional two and one-half year terms ending June 30, 2000 and
December 31, 2002. Future minimum lease payments are due through June 30, 2000
and amount to $119,000 for the first nine months of fiscal 2000. The Company
also retains an option to purchase the building at fair market value, but not to
exceed $2,262,000, exercisable at the end of the current renewal term and of the
additional renewal term, if elected. Management believes the current facility is
capable of meeting the Company's anticipated needs for the foreseeable future.
Item 3. LEGAL PROCEEDINGS
On November 19, 1998, the Company settled the shareholder
litigation initiated by Philip Phalon and Dr. Mahmud Awan, which had been
pending in Middlesex County, Massachusetts Superior Court since February 1998.
Pursuant to such settlement, the Company, Arnold McCalmont, Herbert A. Lerner,
Robert T. Lessard, Carl H. Guild, Jr., Mitchell B. Briskin, Donald Lake and
Thomas E. Peoples entered into a settlement agreement with M. Mahmud Awan and
Philip A. Phalon. The settlement agreement and standstill agreement set forth
mutual full releases as to the litigation and also include provisions requiring,
among other things, (i) the Company to reimburse the former proxy contestants'
expenses in payments aggregating $395,000, (ii) the dissolution of the Awan/
Phalon group created to facilitate the proxy contest and (iii) the former proxy
contestants to abide by certain standstill provisions until October 1, 2000.
The Company is also the defendant in GERARD v. TECHNICAL COMMUNICATIONS
CORPORATION, ET AL., filed in the Superior Court of the Commonwealth of
Massachusetts in 1998. 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. Because the case is in the early stages of discovery, 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
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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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on
February 8, 1999. The meeting was conducted for the purpose of (i) electing two
Class II Directors, each to serve for a term of three years and (ii) ratifying
the election of the Company's independent auditors.
The ratification of the election of the Class II Directors was
approved with 1,161,660 votes in favor, -0-votes against and 14,683
votes abstaining.
The ratification of the Company's auditors was approved with 1,168,541
votes in favor, 6,202 votes against and 1,600 votes abstaining.
PART II
Item 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock, $ .10 par value, is traded on the
over-the-counter market, on the NASDAQ SmallCap Market System, under the symbol
"TCCO". The following table presents low and high bid information for the time
periods specified. The over-the-counter market quotations reflect inter-dealer
prices, without retail markup, markdown or commission and may not necessarily
represent actual transactions. The over-the-counter market quotations have been
furnished by The NASDAQ Stock Market, Inc.
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PRICE
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TITLE OF CLASS QUARTER ENDING LOW HIGH
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Common Stock,
$.10 par value
12/27/97 5.125 9.875
03/28/98 4.000 6.500
06/27/98 5.000 7.500
10/03/98 4.000 8.500
01/02/99 4.500 4.500
04/03/99 2.625 3.250
07/03/99 2.438 2.500
10/02/99 2.563 2.562
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The Company has paid no cash dividends in the past and has no
plans to pay cash dividends in the forseeable future.
As of December 17, 1999, there were approximately 1,200 record
holders of Common Stock, $ .10 par value. On December 17, 1999, the closing
price of the Common Stock was $4.50.
Item 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA:
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FISCAL YEARS ENDED:
OCTOBER 2, OCTOBER 3, SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
1999 1998 1997 1996 1995
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Net Sales:
Domestic $ 1,239,275 $ 1,631,459 $ 2,734,690 $ 3,633,425 $ 1,535,015
Foreign (Note A) 5,194,408 12,224,322 9,523,948 10,379,377 8,692,550
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Total net sales (Note B) 6,433,683 13,855,781 12,258,638 14,012,802 10,227,565
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<S> <C> <C> <C> <C> <C>
Gross profit 3,305,192 8,393,173 7,104,975 8,231,388 5,351,882
Net income (loss) (1,218,542) 481,603 (1,243,501) 532,147 88,745
Net income (loss) per share of common stock (Note C)
Basic $ (.96) $ .38 $ (.98) $ .42 $ .07
Diluted $ (.96) $ .37 $ (.98) $ .41 $ .07
Weighted average
shares outstanding
Basic 1,264,626 1,281,924 1,270,625 1,257,384 1,252,567
Diluted 1,264,626 1,288,007 1,270,625 1,298,387 1,252,567
<CAPTION>
AS OF:
OCTOBER 2, OCTOBER 3, SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
Assets $ 10,660,915 $ 16,172,729 $ 12,892,899 $ 16,000,033 $ 15,348,435
Line of credit/current portion,
long-term debt (D) - 2,250,000 - 1,145,175 696,136
Long-term obligations - - - 1,200,000 2,550,612
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Notes to Selected Financial Data
(A) A summary of foreign sales by geographic area may be found in Note 15 of
the Notes to Consolidated Financial Statements.
(B) Amounts include the sales since May 31, 1995 of Datotek, Inc. The Company
acquired the assets comprising the secure communications business of
Datotek, Inc. on May 31, 1995.
(C) Dual Earnings per Share reporting in accordance with Financial Accounting
Standards Board Statement 128, "Earnings Per Share". Diluted weighted
average shares outstanding have not been calculated for fiscal year 1995.
(D) At October 3, 1998, amount represents outstanding borrowings against line
of credit.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and the
results of operations should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto appearing elsewhere herein.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
The discussions in this Form 10-K, including any discussion of or impact,
expressed or implied, on the Company's anticipated operating results and future
earnings, 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. These and other risks are detailed from time to time in the
Company's filings with the Securities and Exchange Commission, including this
Form 10-K for the fiscal year ended October 2,1999.
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, 1999 is usually stored as 99
(or 9). 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
The Company 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 of October 2, 1999, the Company has completed
all of its Y2K efforts in the areas described above with the exception of our
internal telephone system.
The Company 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.
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
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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 October 2, 1999, all internal systems have been reviewed and
evaluated. Except for the item noted above, all internal systems are now Y2K
compliant. The remaining item will be upgraded by December 31, 1999. 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 October 2, 1999, the main portion of these costs relates to the evaluation
and testing of products for Y2K compliance. The Company anticipates additional
costs of approximately $2,500 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 The Company 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
The Company 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.
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales for the years ended October 2, 1999 and October 3, 1998, were
$6,434,000 and $13,856,000, respectively. This decrease of 54% 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.
More specifically, weakened economic conditions in many countries resulted in
reduced order flow from our traditional international government markets.
Gross profit for the year ended October 2, 1999 was $3,305,000, as compared to
gross profit of $8,393,000 for the same period of fiscal year 1998. This
represented a 61% decrease in gross profit for the period. Gross profit
expressed as a percentage of sales was 51% in 1999 as compared to 61% for the
same period in fiscal
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year 1998. The disparity between the two fiscal years is attributed to the
negative impact of a higher percentage of fixed costs due to the lower sales
volume and the sale of a less favorable mix of lower margin products during
1999.
Selling, general and administrative expenses were $4,312,000 for the year ended
October 2, 1999 and were $6,221,000 for fiscal year 1998. This decrease of 31%
was primarily attributable to a decrease of $1,506,000 in payroll and travel
related costs and contract services support, associated with the lower sales
volume and the continued emphasis on expense controls. In addition, there was a
decrease in legal fees of $222,000 attributed to the settlement of most
litigation in early 1999 and a reduction in bad debt expense of $187,000 due to
the completion of a major contract in 1998, which required substantial coverage.
These decreased costs were offset by an increase in product demonstration costs
of $99,000 and commissions to third party representatives of $125,000.
Product development costs for the year ended October 2, 1999 were $1,936,000
compared to $1,415,000 for the same period in fiscal 1998. This increase of 37%
was attributable to the continued commitment to new product development,
particularly the Cipher X 7000 series product line, and lower volume of billable
development contracts.
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 $118,000 during fiscal 1998 to a net income position of $143,000 for
the current year.
The Company incurred a net loss of $1,219,000 for the year ended October 2, 1999
as compared to net income of $482,000 for the same period in fiscal 1998.
Included in the net loss for fiscal 1999 is a one-time gain on the sale of an
investment of $1,151,000 and a loss from operations of $2,943,000. The decrease
in profitability is primarily attributable to the decrease in gross profit as
described above.
The effects of inflation and changing costs have not had a significant impact on
sales or earnings in recent years. As of October 2, 1999, 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.
FISCAL 1998 COMPARED TO FISCAL 1997
Consolidated net sales for the year ended October 3, 1998, were $13,856,000
compared with sales of $12,259,000 for the prior fiscal year. This increase of
$1,597,000, or 13%, is mainly attributed to shipment of a large order for
encryption equipment to a foreign customer.
Foreign sales increased by $2,700,000, or 28%, to $12,224,000, primarily due to
the aforementioned sale. On the other hand, domestic sales decreased $1,103,000,
or 40%, to $1,631,000; the decrease is predominantly due to continued
procurement reductions by U. S. government agencies.
Gross profit for fiscal year 1998 was $8,393,000, compared to $7,105,000 in
fiscal 1997, an increase of 18%. 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.
Product development costs in fiscal 1998 were $1,415,000, compared to $2,379,000
in fiscal 1997. The $964,000, or 41%, 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 $6,282,000
in fiscal 1997 to $6,221,000 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
litigation.
<PAGE>
Investment income earned during fiscal 1998 was $24,000, compared to $129,000 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 $482,000, or $.37 per diluted share during
fiscal 1998, compared to a net loss of $1,244,000, 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.
RECENT ACCOUNTING PRONOUNCEMENTS
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 items".
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 establishes standards for
the way that public companies report information about operating segments and
geographic distribution of sales 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 Statement is effective for fiscal
years beginning after December 15, 1997. The adoption of this Statement did not
have a material effect on the Company's financial statements, as the Company has
only one operating segment.
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. 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. Management does not expect the adoption of
this statement to have a material impact on its financial position or results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $1,599,000 or 216% to $2,339,000 as of
October 2, 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, paying down the line of credit and a reduction in
current liabilities. The current ratio increased to 6.7:1 at October 2, 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.
At October 2, 1999, the Company has a $5,000,000 revolving line of credit at a
rate of prime plus 1/2 of 1% (8.75% at October 2, 1999) 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 October 2, 1999, the
Company is in compliance with these covenants. The amount of borrowings is
restricted to a percentage of certain accounts receivable and inventory
balances. Availability under the line of credit has been reduced by $67,476, as
of October 2, 1999, as a result of standby letters of credit. No other
borrowings are outstanding against the line.
During the year ended October 3, 1998, the Company borrowed $4,500,000 under its
line of credit. The Company repaid $2,250,000 during 1998, reducing the
outstanding indebtedness to $2,250,000 at the end of
<PAGE>
fiscal 1998. On October 8, 1998, the Company repaid the entire amount borrowed
following receipt of payment in full of an outstanding receivable from a
significant sale during 1998.
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index to the Financial Statements and Schedules under Part
IV, Item 14, in this report.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
(a) IDENTIFICATION OF DIRECTORS
The following table sets forth the year each director first became a
director, the position currently held by each director with the Company, their
principal occupation during the past five years, any other directorships held by
such person in any company subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended, or in any company registered as an
investment company under the Investment Company Act of 1940, as amended, and
their age. The terms of the Class I Directors expire at the 2001 Annual Meeting
of Stockholders; the terms of the Class II Directors expire at the 2002 Annual
Meeting of Stockholders and the terms of the Class III Directors expire at the
2003 Annual Meeting of Stockholders.
<TABLE>
<CAPTION>
Name and Year First Positions and Offices
Became a Director with the Company
----------------- ----------------
<S> <C> <C>
Dr. Mahmud Awan (1) (8) 1998 Director, Chairman of the Board 48
Class I Director
David A. B. Brown (2) (8) 1998 Director 56
Class II Director
Mitchell B. Briskin (3) 1998 Director 40
Class I Director
Carl H. Guild, Jr. (4) 1997 Director, Vice Chairman of the 55
Class III Director Board, Chief Executive Officer
and President
Donald Lake (5) 1998 Director 55
Class III Director
Robert T. Lessard (6) 1997 Director 59
Class II Director
Thomas E. Peoples (7) 1998 Director 51
Class III Director
</TABLE>
(1) Dr. Awan joined the Board of Directors and became Chairman of the Board on
November 19, 1998. Dr. Awan has served as Chairman and Chief Executive
Officer of TechMan International Corporation, a privately held manufacturer
of fiber optic medical devices and communication systems, since 1982. Dr.
Awan is also President/CEO of Sturbridge Finance limited, a venture capital
firm based in Sturbridge, Massachusetts.
<PAGE>
(2) Mr. Brown joined the Board of Directors on November 19, 1998, filling a
vacancy created by the resignation of Herbert A. Lerner. Since 1984, Mr.
Brown has been the president of The Windsor Group, Inc., a business
consulting firm focused on the oil industry and international operations.
(3) Mr. Briskin, a Vice-President at Stonebridge Associates LLP since 1999, was
re-elected to the Board of Directors in August 1998 in accordance with the
terms of the settlement of litigation. From 1997 to 1999 Mr. Briskin was a
principal at Concord Investment Partners. From 1996 to 1997 Mr. Briskin was
attending Harvard Business School. From 1990 to 1995, Mr. Briskin was
General Manager at General Chemical Corporation; previously, he was a
lawyer with Patterson, Belknap, Webb & Tyler in New York City.
(4) In conjunction with the legal settlements reached by the Company on
November 19, 1998 and the appointment of Dr. Awan as Chairman of the Board,
Mr. Guild was named to the new position of Vice Chairman of the Board on
the same date. Mr. Guild had served as Chairman of the Board and Chief
Executive Officer of the Company from February 13, 1998 until November 19,
1998; he continues to serve as Chief Executive Officer and President.
Mr.Guild was elected to the Board on May 1, 1997 and had been an
independent consultant to the Company from that time until February 13,
1998. From 1993 to 1997, he was a Senior Vice President with Raytheon
Engineers and Constructors, Inc., a unit of Raytheon Company.
(5) Mr. Lake has been a financial consultant to various government agencies
since 1991. Before initiating his consulting practice, Mr. Lake served as
Director of the International Banking Services Division of the American
Security Bank in Washington, D.C.
(6) Mr. Lessard was employed in a variety of management positions from 1966
through December 1995 at the U.S. National Security Agency ("NSA"),
Department of Defense. During his final two years at NSA, Mr. Lessard was
the Group Chief in the Operations Directorate responsible for
communications and cryptographic technology. Since his retirement in
December 1995, he has represented the Director of the National Security
Agency on several special projects.
(7) Mr. Peoples is a Senior Vice President of Gencorp, a publicly held
manufacturer of automotive, polymer, aerospace and defense products, and
has been employed by that Company since 1992. Previously, Mr. Peoples
served as Manager of Business Development for Smart Munitions Programs at
Raytheon Company.
(8) Dr. Awan and Mr. Brown were elected pursuant to the settlement agreement
set forth in Item 3.
(b) IDENTIFICATION OF EXECUTIVE OFFICERS
The following table sets forth the names of all executive officers of
the Company, excluding those who are also directors, the year each first became
an executive officer, the position currently held by each officer of the
Company, the principal occupation of each officer during the past five years,
and the age of each officer.
<TABLE>
<CAPTION>
Name and Year Positions and Offices with
First Became an Officer the Company Age
----------------------- ----------- ---
<S> <C> <C>
John I. Gill (1) 1985 Executive Vice President 59
Michael P. Malone (2) 1998 Principal Financial Officer/
Treasurer/Assistant secretary 40
</TABLE>
(1) Mr. Gill has been employed by the Company since August 1983.
(2) Mr. Malone has been employed by the Company since November 1998.
<PAGE>
(c) FAMILY RELATIONSHIPS
No director or executive officer is related to any other director
or executive officer by blood or marriage.
(d) SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors, and persons who beneficially own
more than ten percent (10%) of the Company's stock, to file initial reports of
ownership on Form 3 and reports of changes in ownership on Form 4, and annual
statements of beneficial ownership on Form 5 with the SEC and any national
securities exchange on which the Company's securities are registered. Executive
officers, directors and greater than ten percent (10%) beneficial owners are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on a review of the copies of such forms furnished to the
Company and written representations from the executive officers and directors
that no other reports were required, the Company believes that, during fiscal
1998, its executive officers, directors and greater than ten percent (10%)
beneficial owners complied with all applicable Section 16(a) filing
requirements, with the exception of the late filing of a Form 3 for Mr. Malone,
Principal Financial Officer of the Company, and the late filing of Form 4's
reporting 136 non-discretionary purchases and sales pursuant to margin calls on
behalf of Dr. M. Mahmud Awan, Chairman, individually and 47 transactions by
TechMan International Corporation, which is wholly-owned by Dr. Awan.
Item 11. EXECUTIVE COMPENSATION
(a) SUMMARY COMPENSATION TABLE
The following tables set forth certain summary information
concerning compensation paid or accrued by the Company during the past three
fiscal years to its Chief Executive Officer and the other executive officers of
the Company whose annual compensation during Fiscal Year 1999 exceeded $100,000
(hereafter referred to as the "named executive officers"):
<TABLE>
<CAPTION>
Fiscal All Other
Name and Principal Position Year Salary Bonus Compensation
- --------------------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Carl H. Guild, Jr. (4) 1999 $ 199,680 $ - $ 4,814(5)
Chief Executive Officer and President 1998 $ 126,548 $ - $125,502(6)
1997 $ - $ - $ 3,600(7)
John I. Gill 1999 $ 119,745 $ 19,700(3) $ 1,797(1)
Executive Vice President 1998 $ 118,591 - $ 1,493(2)
1997 $ 116,325 $ 18,171(3) -
</TABLE>
(1) Represents the Company's 25% match on the first 6% of Mr. Gill's 1999
fiscal year 401(k) contribution.
(2) Represents the Company's 25% match on the first 6% of Mr. Gill's 1998
fiscal year 401(k) contribution.
(3) These amounts of $19,700 and $18,171 were paid to Mr. Gill for
services rendered in fiscal years 1998 and 1996, respectively. No
payment was received in fiscal year 1998 for services rendered in
fiscal 1997.
(4) Prior to his employment as Chief Executive Officer of the Company and
his election as Chairman of the Board on February 13, 1998, Mr. Guild
had been an independent consultant to the Company and a Director since
May 1, 1997.
<PAGE>
(5) Includes income realized upon receipt of Company stock of $2,000 as a
result of a February 8, 1999 grant by the Company's Board of Directors
and $2,814 representing the Company's 25% match on the first 6% of Mr.
Guild's 1999 fiscal year 401(k) contribution.
(6) Includes consultant's fees and expenses of $109,689 related to work
performed in fiscal year 1997 and paid in fiscal 1998, as well as work
performed prior to February 13, 1998 and paid in fiscal 1998. The
total also includes Director's fees of $11,300 from the beginning of
fiscal 1998 until February 13, 1998, income realized upon receipt of
company stock of $3,015 as a result of the Company's August 14, 1998
grant of stock to members of its Board of Directors and $1,498 for the
Company's 25% match on the first 6% of Mr. Guild's fiscal 1998 401(k)
contribution.
(7) Includes Director's fees earned and paid in fiscal year 1997. Although
Mr. Guild performed consulting services for the Company in fiscal
1997, no payments to him were made until the following year.
(b) STOCK OPTIONS
Set forth below is an Option/SAR Grants table concerning individual
grants of stock options and SARs made during fiscal 1999 to each of
the named executive officers.
OPTIONS/SAR GRANTS IN FISCAL YEAR 1999
<TABLE>
<CAPTION>
Number of Percent of Total Potential realizable Value At
Securities Options/SARs Exercise Assumed Annual
Underlying Options/ Granted to Employees of Base Expiration Rates of Stock Price
Sars Granted in FY 1999(1) Price ($/sh) Date Appreciation for Option Term
------------ ------------- ------------ ---- ----------------------------
0% 5% 10%
-- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Carl H. Guild, Jr. 100,000 (2) 82.6% $4.00 11/19/08 - $252,000 $637,000
1,000 (3) .8% $3.40 2/8/04 $600 $3,000 $7,000
John I. Gill - - - - - - -
</TABLE>
(1) In fiscal year 1999, options to purchase a total of 121,000 shares of the
Company's Common Stock were granted to employees of the Company.
(2) Common Stock options which were granted to Mr. Guild under the 1991 Plan on
November 19, 1998. These options are exercisable as follows: (i) 60,000
shares became exercisable on 11/19/98 at an exercise price of $4.00 per
share, (ii) 20,000 shares became exercisable on 6/30/99 at an exercise
price of $4.00 and (iii) 20,000 shares became exercisable on 9/30/99 at an
exercise price of $4.00.
(3) Common Stock options which were granted to Mr. Guild under the 1991 Plan on
February 8, 1999, exercisable immediately.
The above table does not include outstanding options granted to the Company's
former president, Dale G. Peterson, on March 2, 1998 to purchase 20,000 shares
of Common Stock under the 1991 Plan. These shares were granted and exercisable
on that date at an exercise price of $6.38 per share.
Set forth below is a table concerning each exercise of stock options (or tandem
SARs) and freestanding SARs during fiscal 1999 by each of the named executive
officers and the value at October 2, 1999 of unexercised options and SARs.
AGGREGATED OPTION/SAR EXERCISES FOR FISCAL YEAR ENDED OCTOBER 2, 1999 AND FISCAL
YEAR OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options
Shares Options at Fiscal Year-end at Fiscal Year End(1)
-------------------------- ---------------------
Acquired on Value
<S> <C>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name Exercise Realized Exercisable Not Exercisable Exercisable Not Exercisable
---- -------- -------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Carl H. Guild, Jr. - - 139,945 (2) 32,000 (3) - -
John I. Gill - - - - - -
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Value is based on the difference between the option exercise
price and the fair market value at October 2, 1999 ($2.563 per
share) multiplied by the number of shares underlying the
in-the-money portion of the option.
(2) This represents exercisable grants of options under the 1991
Plan to buy 8,000 shares granted on May 1, 1997 at the
following exercise dates and prices: (i) 4,000 shares on May
1, 1998 at an exercise price of $8.875 per share (ii) 4,000
shares on May 1, 1999 at an exercise price of $9.76 per share;
30,000 shares granted on February 16, 1998 at the following
exercise dates and prices: (i) 20,000 shares at an exercise
price of $5.000 per share (ii) 10,000 shares at an exercise
price of $5.50; 945 shares granted on August 14, 1998 at an
exercise price of $5.420 per share; 100,000 shares granted on
11/18/98 at an exercise price of $4.00 per share and 1,000
shares granted on February 8, 1999 at an exercise price of
$3.40 per share.
(3) This represents unexercisable grants of options under the 1991
Plan to buy 12,000 shares granted on May 1, 1997 at the
following exercise dates and prices: (i) 4,000 shares on May
1, 2000 at an exercise price of $10.74 per share;(ii) 4,000
shares on May 1, 2001 at an exercise price of $11.81 per share
and (iii) 4,000 shares on May 1, 2002 at an exercise price of
$12.99 per share. This also represents unexercisable grants of
options under the 1991 Plan to buy 20,000 shares granted on
February 16, 1998 which vest on the following dates and are
exercisable at the following prices: (i) 10,000 shares on
February 16, 2000 at $6.05 per share; and (ii) 10,000 shares
on February 16, 2001 at $6.66 per share.
(c) COMPENSATION OF DIRECTORS
Directors who were not regular employees of the Company received a
fee of $1,200 for attendance at all meetings attended during fiscal years
1998 and 1999. In addition, each outside director is the recipient of an
annual retainer of $2,800 paid in arrears in quarterly increments of $700.
During fiscal years 1999 and 1998, outside directors also received a fee of
$500 for each meeting of a committee of the Board of Directors they attended.
Mr. Herbert Lerner, who was an employee of the Company, until his resignation
on November 19, 1998 was also authorized to receive the retainer and fees for
attendance at meetings.
At the 1999 Annual Meeting of the Board of Directors on February 8,
1999 1,000 immediately exercisable stock options were granted to each of the
seven directors, with a term of five years from the date of grant at an
exercise price of $3.40, 85% of fair market value. In addition, a total of
3,500 shares of TCC common stock were granted to seven directors at a price
per share of $4.00, which was equal to fair market value on February 8, 1999.
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table shows, as of December 17, 1999, the ownership
of common stock of the Company by any person or group who is known to the
Company to be the beneficial owner of more than 5% of the Company's common stock
outstanding and entitled to vote as of such date.
<TABLE>
<CAPTION>
Beneficial Ownership Percent of
Name and Address (Number of Shares) (1) Class (1)
---------------- ---------------------- ---------
<S> <C> <C>
M. Mahmud Awan 119,908 (3) 8.2% (3)
c/o TechMan International Corporation
240 Sturbridge Rd.
Charlton City, MA 01506
Concord, MA 01742-2892
Martindale Andres & Company, Inc. 77,000 (2) 5.3% (2)
200 Four Falls Corporate Center, Suite 200
West Conshohocken, PA 19428
Royce & Associates, Inc. 106,700 (4) 7.3% (4)
c/o Charles M. Royce
1414 Avenue of the Americas
New York, NY 10019
</TABLE>
(1) Unless otherwise indicated, each of the persons named in the table has
sole voting and investment power with respect to the shares set forth
opposite such person's name. Information with respect to beneficial
ownership is based upon information furnished by each stockholder to
the Company directly or to the Securities and Exchange Commission
("SEC").
(2) The nature of ownership of Martindale Andres & Company (MAC) as set
forth herein is based upon a Schedule 13D filed with the Securities and
Exchange Commission (SEC) on September 15, 1998. The Schedule 13D was
filed on behalf of a "group" (as defined in Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended) consisting of Dr. Mahmud
Awan, Philip A. Phalon, Robert B. Bregman and William C. Martindale,
Jr., principal of MAC. Of the 77,000 shares, Mr. Martindale has sole
dispositive and voting power over 10,000 shares and shared dispositive
and voting power over 67,000 shares.
(3) Dr. Awan individually owns 60,930 shares of Common Stock, which
includes 1,000 shares issuable upon the exercise of vested stock
options. TechMan International Corporation, which is wholly owned by
Dr. Awan, owns 58,978 shares of Common Stock.
(4) The nature of ownership of Royce & Associates, Inc. (Royce) as set
forth herein is based upon their Schedule 13G filed February 10, 1999
with the SEC. Royce in its capacity as investment advisor may be deemed
the beneficial owner of the 106,700 shares indicated in the above
table, which shares are owned by numerous clients of Royce. Mr. Royce
disclaims beneficial ownership of the 106,700 shares owned by Royce.
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the number of shares and percentage
of common stock of the Company outstanding and entitled to vote beneficially
owned by each director and named executive officer as well as all directors and
officers as a group as of December 17, 1999:
<TABLE>
<CAPTION>
Amount and Nature of
Name and Year First BECAME A Positions and Offices Beneficial Ownership (# of Percent of
Director (1) With the Company Age Shares)(1) Class (1)
------------ ---------------- --- ---------- ---------
<S> <C> <C> <C> <C>
M. Mahmud Awan (2) Director, 48 119,908 (3) 8.2%
1998 - Class I Director Chairman of the Board
Mitchell B. Briskin (4) Director 40 2,502 (5) *
1998 - Class I Director
David A. B. Brown (6) Director 56 3,585 (7) *
1998 - Class II Director
Robert T. Lessard (8) Director 59 4,003 (9) *
1997 - Class II Director
Carl H. Guild, Jr. (10) Director, 55 141,503 (11) 9.7 %
1997 - Class III Director Vice Chairman of the
Board, Chief
Executive Officer and
President
Donald Lake (12) Director 55 2,502 (13) *
1998 - Class III Director
Thomas E. Peoples (14) Director 51 3,052 (15) *
1998 - Class III Director
Non-Director Officers:
John I. Gill (16) Executive Vice 60 19,551 1.3 %
President
Michael P. Malone (17) Principal Financial 40 1,342 (18) *
Officer, Treasurer and
Assistant Clerk
ALL DIRECTORS, DIRECTOR NOMINEES AND 297,948 (19) 20.4 %
OFFICERS AS A GROUP (9 PERSONS)
</TABLE>
(1) Unless otherwise indicated, each of the persons named in the
table has sole voting and investment powers with respect to the
shares set forth opposite such person's name. With respect to
each person or group, percentages are calculated based on the
number of shares beneficially owned plus shares that may be
acquired by such person or group within sixty days of December
17, 1999, upon the exercise of stock options. Unless otherwise
indicated herein, none of the persons named in this table is, or
was within the past year, a party to any contract, arrangement
or understanding with any person with respect to any securities
of the Company, including, but not limited to, joint ventures,
loan or option arrangements, puts or calls, guarantees against
loss or guarantees of profit, division of losses or profits or
the giving or withholding of proxies. None of the persons named
in the table, nor any of their respective
<PAGE>
associates have any arrangement or understanding with any person
with respect to any future employment by the Company or its
affiliates, or with respect to any future transactions to which
the Company or any of its affiliates will or may be a party.
Except as otherwise described herein, none of the persons named
in this table own any security of the Company of record but not
beneficially. The address of Messrs. Awan, Briskin, Brown,
Lessard, Guild, Lake, Peoples, Gill and Malone is c/o Technical
Communications Corporation, 100 Domino Drive, Concord,
Massachusetts 01742.
(2) Dr. Awan joined the Board of Directors and became Chairman of
the Board on November 19, 1998, following settlement of
shareholder litigation (the "Litigation") initiated by Dr. Awan
and Philip A. Phalon, a former director of the Company, which
had been pending in Middlesex County, Massachusetts Superior
Court since February, 1998. Dr. Awan has served as Chairman and
Chief Executive Officer of TechMan International Corporation
("Techman"), a privately held manufacturer of fiber optic
medical devices and communication systems, since 1982. Dr. Awan
is also President/CEO of Sturbridge Finance limited, a venture
capital firm based in Sturbridge, Massachusetts.
(3) Includes 58,978 shares owned by TechMan, which is wholly owned
by Dr. Awan, and 1,000 shares issuable upon the exercise of
stock options.
(4) Mr. Briskin is Vice President of Stonebridge Associates, an
investment bank, since 1999. Mr. Briskin was formerly a
principal at Concord Investment Partners from 1997 to 1999. From
1996 to 1997 Mr. Briskin was attending Harvard Business School.
From 1990 to 1995, Mr. Briskin was General Manager at General
Chemical Corporation; previously, he was a lawyer with
Patterson, Belknap, Webb & Tyler in New York City.
(5) Includes an aggregate of 1,278 shares issuable upon the exercise
of various stock options.
(6) Mr. Brown joined the Board of Directors on November 19, 1998,
filling a vacancy created by the resignation of Herbert A.
Lerner. Since 1984, Mr. Brown has been the President of The
Windsor Group, Inc., a business consulting firm focused on the
oil industry and international operations.
(7) Includes an aggregate of 1,000 shares issuable upon the exercise
of a stock option.
(8) Mr. Lessard was employed in a variety of management positions
from 1966 through December 1995 at the U.S. National Security
Agency ("NSA"), Department of Defense. During his final two
years at NSA, Mr. Lessard was the Group Chief in the Operations
Directorate responsible for communications and cryptographic
technology. Since his retirement in December 1995, he has
represented the Director of the National Security Agency on
several special projects.
(9) Includes an aggregate of 1,945 shares issuable upon the exercise
of stock options.
(10) In conjunction with the settlement of the Litigation reached by
the Company on November 19, 1998 and the appointment of Dr. Awan
as Chairman of the Board, Mr. Guild was named to the new
position of Vice Chairman of the Board on the same date. Mr.
Guild had served as Chairman of the Board and Chief Executive
Officer of the Company from February 13, 1998 until November 19,
1998; he continues to serve as Chief Executive Officer and
President. Mr. Guild was elected to the Board on May 1, 1997 and
had been an independent consultant to the Company from that time
until February 13, 1998. From 1993 to 1997, he was a Senior Vice
President with Raytheon Engineers and Constructors, Inc., a unit
of Raytheon Company. Mr. Guild serves as President and Chief
Executive Officer of the Company pursuant to an Employment
Agreement with Company previously filed with the SEC as an
Exhibit to the Company's Form 10-K for the year ending October
3, 1998.
<PAGE>
(11) Includes an aggregate of 139,945 shares issuable upon the
exercise of various stock options that have vested. Excludes
32,000 shares subject to options that have not vested as of or
within sixty days of December 17, 1999.
(12) Mr. Lake has been a financial consultant focusing on
international financial operations related to intelligence and
law enforcement activities to various government agencies since
1991. Before initiating his consulting practice, Mr. Lake served
as Director of the International Banking Services Division of
the American Security Bank in Washington, D.C.
(13) Includes an aggregate of 1,278 shares issuable upon the exercise
of stock options.
(14) Since October 1, 1999, Mr. Peoples is a Senior Vice President of
Gencorp, Inc., a publicly held manufacturer of automotive,
polymer, aerospace and defense products. From 1992 to September
30, 1999, Mr. Peoples was the Vice President for International
and Washington Operations of Aerojet, a privately held aerospace
and defense contractor. Prior to 1992, Mr. Peoples served as
Manager of Business Development for Smart Munitions Programs at
Raytheon Company.
(15) Includes an aggregate of 1,278 shares issuable upon exercise of
stock options.
(16) Mr. Gill, Executive Vice President since 1995, has been employed
by the Company since August, 1983. He was Vice President,
Manufacturing and Technical Operations from 1989 to 1995.
(17) Mr. Malone joined the Company in 1998 as Principal Financial
Officer and Treasurer. From 1997 to 1998 he was the Controller
at Vasca, Inc., a privately held medical device company. Prior
to 1997, Mr. Malone was with Zoll Medical Corporation, a
publicly traded medical device company for five years as its
Controller and Treasurer.
(18) Includes an aggregate of 1,000 shares issuable upon the exercise
of a stock option. Excludes 4,000 shares subject to options that
have not vested as of or within sixty days of December 17, 1999.
(19) Includes an aggregate of 148,724 shares of common stock issuable
upon the exercise of vested stock options. Excludes 36,000
shares issuable upon the exercise of stock options that have not
vested as of or within sixty days of December 17, 1999.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Carl H. Guild, Jr., Vice Chairman of the Board, Chief Executive Officer
and President of the Company, was formerly a Trustee of the Technical
Communications Corporation Employees' Stock Ownership Trust, which has been
formally dissolved. Herbert A. Lerner, who resigned as a Director of the Company
and as Company Treasurer and Chief Financial Officer on November 19, 1998, was
also formerly a Trustee of the Employees' Stock Ownership Plan. At its August
27, 1997 meeting, the Board of Directors voted to terminate the Employee Stock
Ownership Plan effective October 1, 1997.
Edward E. Hicks, Esq., the Company's Secretary and Clerk, is a member
of a law firm that provides legal services to the Company.
On November 19, 1998, the Company settled the Litigation described in
Item 3. Pursuant to such settlement, the Company, Arnold McCalmont, Herbert A.
Lerner, Robert T. Lessard, Carl H. Guild, Jr., Mitchell B. Briskin, Donald Lake
and Thomas E. Peoples entered into a settlement agreement with M. Mahmud Awan
and Philip A. Phalon. The settlement agreement and standstill agreement set
forth mutual full releases as to the litigation and also include provisions
requiring, among other things, (i) the Company to reimburse the former proxy
contestants' expenses in payments aggregating $395,000, (ii) the dissolution of
the Awan/ Phalon group created to facilitate the proxy contest and (iii) the
former proxy contestants to abide by certain standstill provisions until October
1, 2000.
<PAGE>
On June 27, 1995, the Company invested $250,800 for a minority interest
in Series B Preferred Stock of Net2Net Corporation, then a privately held
company that developed high performance management and analysis systems for
Asynchronous Transfer Mode ("ATM") networks. 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. During fiscal 1999, the Company sold
its holdings in Visual for the aggregate sum of $1,401,972, excluding expenses.
Net2Net's President was Stephen McCalmont, son of Arnold M. McCalmont,
a former director and former Chairman of Technical Communications Corporation,
and brother of James A. McCalmont, another former director of the Company. Both
of these gentlemen, in addition to Herbert A. Lerner, a former director, Chief
Financial Officer and Treasurer of the Company, were also investors in Net2Net
Corporation.
<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:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets as of
October 2, 1999 and October 3, 1998 F-1
Consolidated Statements of Operations for the Years Ended
October 2, 1999, October 3, 1998 and September 27,1997 F-2
Consolidated Statements of Cash Flows for the Years Ended
October 2, 1999, October 3, 1998 and September 27,1997 F-3
Consolidated Statements of Comprehensive Income (Loss) and
Stockholders' Equity for the Years Ended October 2, 1999,
October 3, 1998 and September 27, 1997 F-4
Notes to Consolidated Financial Statements F-5-F-14
Report of Independent Public Accountants F-15
[a] (2) The following Consolidated Financial Statement Schedule is included
herein:
Schedule II - Valuation and Qualifying Accounts S-1
Report of Independent Public Accountants S-1
</TABLE>
(a) 3 List of Exhibits
- ----- ----------------
3.1* Articles of Organization of the Company
3.2 ** 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 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.
*** Incorporated by reference to the Company's Annual Report for 1998
Form 10-K, as amended, filed with the Securities and Exchange
Commission on March 26, 1998.
(b) REPORTS ON FORM 8-K
During the fourth quarter of fiscal 1999, Technical Communications
Corporation made one (1) filing on Form 8-K. Current Reports on Form
8-K were filed with the Securities and Exchange Commission on September
20, 1999. Item 5 was reported as follows: Technical Communications
Corporation (the "Company") reported the Company will be listed on the
NASDAQ SmallCap Market System effective with the open of business
Friday, September 17, 1999.
<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 on December 22, 1999.
TECHNICAL COMMUNICATIONS CORPORATION
By: /s/ CARL H. GUILD, JR.
----------------------
Carl H. Guild, Jr.
Chief Executive Officer and President
Vice Chairman of the Board, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Carl H. Guild, Jr. Chief Executive Officer and President December 22, 1999
----------------------
Carl H. Guild, Jr. Vice Chairman of the Board, Director
(Principal Executive Officer)
/s/ Michael P. Malone Treasurer and Principal Financial Officer December 22, 1999
---------------------
Michael P. Malone (Principal Financial
and Accounting Officer)
/s/ Dr. Mahmud Awan Chairman of the Board, Director December 22,1999
-------------------
Dr. Mahmud Awan
/s/ Mitchell B. Briskin Director December 22, 1999
-----------------------
Mitchell B. Briskin
/s/ David A. B. Brown Director December 22, 1999
---------------------
David A. B. Brown
/s/ Donald Lake Director December 22, 1999
---------------
Donald Lake
/s/ Robert T. Lessard Director December 22, 1999
---------------------
Robert T. Lessard
/s/ Thomas E. Peoples Director December 22, 1999
---------------------
Thomas E. Peoples
</TABLE>
<PAGE>
TECHNICAL COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
OCTOBER 2, 1999 AND OCTOBER 3, 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,338,935 $ 740,049
Accounts receivable - trade, less allowance
for doubtful accounts of $70,000 2,603,401 8,196,296
Inventories 3,035,937 3,119,291
Refundable income taxes 276,960 361,532
Deferred income taxes 809,555 499,521
Other current assets 84,065 88,483
-------------------------------------------
Total current assets 9,148,853 13,005,172
-------------------------------------------
Equipment and leasehold improvements 4,640,222 4,818,515
Less accumulated depreciation (3,960,614) (3,773,457)
-------------------------------------------
Equipment and leasehold improvements, net 679,608 1,045,058
-------------------------------------------
Goodwill 1,614,131 1,614,131
Less accumulated amortization (931,352) (716,443)
-------------------------------------------
Goodwill, net 682,779 897,688
-------------------------------------------
Available for sale investment - 900,800
Other assets 149,675 324,011
-------------------------------------------
$10,660,915 $16,172,729
===========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit - 2,250,000
Accounts payable 258,067 302,742
Accrued liabilities:
Compensation and related expenses 230,654 401,596
Other 870,936 2,241,434
-------------------------------------------
Total current liabilities 1,359,657 5,195,772
-------------------------------------------
Other long-term liabilities 365,721 456,356
Commitments and contingencies
Stockholders' equity
Common stock - par value $.10 per share; 129,454 128,324
authorized 3,500,000 shares, issued 1,294,541
and 1,283,238 shares
Treasury stock at cost, 27,063 and 30,678 shares (213,375) (241,861)
Additional paid-in capital 1,305,870 1,266,197
Accumulated other comprehensive items - 422,000
Retained earnings 7,713,588 8,945,941
-------------------------------------------
Total stockholders' equity 8,935,537 10,520,601
-------------------------------------------
$10,660,915 $16,172,729
===========================================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-1
<PAGE>
TECHNICAL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 2, 1999 AND OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net sales $ 6,433,683 $13,855,781 $12,258,638
Cost of sales 3,128,491 5,462,608 5,153,663
------------------------------------------------------------
Gross profit 3,305,192 8,393,173 7,104,975
------------------------------------------------------------
Operating expenses:
Selling, general and
administrative expenses 4,312,162 6,220,992 6,282,108
Product development costs 1,935,859 1,414,746 2,378,564
------------------------------------------------------------
Total operating expenses 6,248,021 7,635,738 8,660,672
------------------------------------------------------------
Operating profit (loss) (2,942,829) 757,435 (1,555,697)
Other income (expense)
Gain on sale of investment 1,151,172 - -
Investment income 147,860 24,068 128,722
Interest expense (4,641) (142,056) (63,979)
Other 23,717 2,690 (167,047)
------------------------------------------------------------
Total other income (expense) 1,318,108 (115,298) (102,304)
------------------------------------------------------------
Income (loss) before income taxes (1,624,721) 642,137 (1,658,001)
Provision (benefit) for income taxes (406,179) 160,534 (414,500)
------------------------------------------------------------
Net income (loss) $ (1,218,542) $ 481,603 $(1,243,501)
============= =========== ============
Net income (loss) per common share
Basic (0.96) 0.38 (0.98)
Diluted (0.96) 0.37 (0.98)
Weighted average common shares outstanding
Basic 1,264,626 1,281,924 1,270,625
Diluted 1,264,626 1,288,007 1,270,625
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
TECHNICAL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 2, 1999 AND OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ($1,218,542) 481,603 (1,243,501)
Adjustments to reconcile net income (loss)
to cash provided by (used for) operating activities:
Depreciation and amortization 896,965 873,642 911,331
Loss on disposal of fixed assets 28,697 20,000 192,425
Non-cash compensation 14,675 18,263 -
Deferred income taxes (167,341) 9,907 (70,904)
Gain on sale of investment (1,151,168) - -
Compensation associated with ESOP - - 167,403
Changes in current assets and current liabilities:
Accounts receivable 5,592,895 (4,936,747) (40,425)
Unbilled revenue - 198,038 (198,038)
Inventories 83,354 304,688 (808,207)
Refundable income taxes 84,572 (68,903) (292,629)
Other current assets 4,418 29,464 81,175
Accounts payable and accrued liabilities (1,586,926) 114,723 (277,086)
----------------------------------------------------------
Cash provided by (used for) operating activities 2,581,599 (2,955,322) (1,578,456)
----------------------------------------------------------
INVESTING ACTIVITIES:
Additions to equipment and leasehold improvements (166,581) (511,423) (533,177)
Proceeds from disposal of equipment - - 38,884
Cancellation of life insurance policies 5,437 152,787 -
Long term receivable (9,824) 114,665 (104,841)
Proceeds from sale of investment 1,401,968 - -
Investment in capitalized software - (275,101) (34,104)
Other assets - 1,500 (796)
----------------------------------------------------------
Cash provided by (used for) investing activities 1,231,000 (517,572) (634,034)
----------------------------------------------------------
FINANCING ACTIVITIES:
Exercise of stock options, including
income tax benefits - 88,689 53,387
Proceeds from stock issuance 40,803 - -
Borrowings under line of credit - 4,500,000 500,000
Payment of line of credit (2,250,000) (2,250,000) (500,000)
Payment of long-term debt (4,516) (2,494) (2,345,175)
----------------------------------------------------------
Cash provided by (used for) financing activities (2,213,713) 2,336,195 (2,291,788)
----------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,598,886 (1,136,699) (4,504,278)
Cash and cash equivalents at beginning of year 740,049 1,876,748 6,381,026
----------------------------------------------------------
Cash and cash equivalents at end of year $2,338,935 $740,049 $1,876,748
==========================================================
SUPPLEMENTAL DISCLOSURES:
Interest paid 7,123 139,063 70,991
Income taxes paid (net of refunds received) (36,366) 108,765 408,193
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
TECHNICAL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) AND STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 2, 1999 AND OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $ (1,218,542) $ 481,603 $ (1,243,501)
Other comprehensive items:
Unrealized gain on available for sale investment 326,262 422,000 -
Less: reclassification adjustment for gains
included in net loss, net of income taxes (748,262) - -
--------------------------------------------------------
Total comprehensive income (loss) $ (1,640,542) $ 903,603 $ (1,243,501)
========================================================
STOCKHOLDERS' EQUITY
Shares of common stock:
Beginning balance 1,283,238 1,273,703 1,264,496
Exercise of stock options - 9,535 9,207
Issuance of shares to ESPP participants 11,303 - -
========================================================
Ending balance 1,294,541 1,283,238 1,273,703
========================================================
Common stock at par value:
Beginning balance $ 128,324 $ 127,370 $ 126,450
Exercise of stock options - 954 920
Issuance of shares to ESPP participants 1,130 - -
--------------------------------------------------------
Ending balance 129,454 128,324 127,370
--------------------------------------------------------
Additional paid-in capital:
Beginning balance 1,266,197 1,526,110 1,473,643
Exercise of stock options - 87,735 52,467
Issuance of shares to ESPP participants 39,673 - -
Termination of ESOP - (347,648) -
--------------------------------------------------------
Ending balance 1,305,870 1,266,197 1,526,110
--------------------------------------------------------
ESOP deferred compensation:
Beginning balance - (527,772) (695,175)
Principal payments on ESOP debt - - 167,403
Termination of ESOP - 527,772 -
--------------------------------------------------------
Ending balance - - (527,772)
--------------------------------------------------------
Accumulated other comprehensive items:
Beginning balance 422,000 - -
Available for sale investment, net (422,000) 422,000 -
--------------------------------------------------------
Ending balance - 422,000 -
--------------------------------------------------------
Retained earnings:
Beginning balance 8,945,941 8,464,338 9,707,839
Issuance of stock grants (13,811) - -
Net income (loss) (1,218,542) 481,603 (1,243,501)
--------------------------------------------------------
Ending balance 7,713,588 8,945,941 8,464,338
--------------------------------------------------------
Treasury stock:
Beginning balance (241,861) (80,000) (80,000)
Termination of ESOP - (180,124) -
Issuance of stock grants -
28,486 18,263 -
--------------------------------------------------------
Ending balance (213,375) (241,861) (80,000)
--------------------------------------------------------
Total stockholders' equity $ 8,935,537 $ 10,520,601 $ 9,510,046
========================================================
</TABLE>
The accompanying notes are an integral part of these consolidated
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.
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 2, 1999, the
Company's aggregate investment in capitalized software was $357,445
($148,936 net of accumulated amortization).
GOODWILL
The Company acquired substantially all of the assets of Datotek, Inc. in
May 1995. The excess purchase cost over net assets acquired is being
amortized on a straight-line basis over 7 1/2 years. The Company assesses
the future useful life of this asset whenever events or changes in
circumstances indicate that the current useful life has diminished. The
Company considers the future undiscounted cash flows of the acquired
company in assessing the recoverability of this asset. If impairment has
occurred the excess of carrying value over fair value is recorded as a
loss.
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. The deferred revenue from 1998 was
recognized in 1999.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
employee 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 1999 presentation.
INCOME TAXES
The Company records income tax expense (benefit) 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 basis and tax basis 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.
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 term nature of these instruments.
b)Available for Sale Investment- the carrying amount of this asset on the
Company's consolidated balance sheets equals the fair market value
based on the market valuation with the difference between cost and
market value, net of related tax effects, recorded in stockholders'
equity as an unrealized gain on available for sale investment, which is
included in "Accumulated Other Comprehensive Items".
c)Line of Credit- the carrying amount of this liability on the Company's
consolidated balance sheets approximates its fair value because of the
short term nature of this instrument.
EARNINGS PER SHARE
At the beginning of fiscal year 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share," which
establishes standards for computing and presenting earnings per share for
entities with publicly held common stock. 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 included in the
calculation of EPS using the Treasury Stock Method. Exercise of
outstanding stock options is not assumed if the result would be
antidilutive, such as when a net loss is reported for the period or the
option exercise price is greater than the average market price for the
period presented.
FISCAL YEAR-END POLICY
The Company by-laws call for its fiscal year to end on the Saturday
closest to the last day of September, unless otherwise decided by its
Board of Directors. The years 1999 and 1997 ended on October 2, 1999 and
September 27, 1997 and each included 52 weeks, while the year ended
October 3, 1998, included 53 weeks.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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".
OPERATING SEGMENTS
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 establishes
standards for the way that public companies report information about
operating segments and geographic distribution of sales 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 Statement is effective for fiscal years beginning
after December 15, 1997. The adoption of this Statement did not have a
material effect on the Company's financial statements, as the Company has
only one operating segment.
NEWLY ISSUED PRONOUNCEMENTS
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. 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. Management does not
expect the adoption of this statement to have a material impact on its
financial position or results of operations.
(3) EARNINGS PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share", basic and diluted
EPS were calculated as follows:
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 3, SEPTEMBER 27,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
BASIC NET INCOME (LOSS) $(1,218,542) $ 481,603 $(1,243,501)
---------------- --------------- ----------------
WEIGHTED AVERAGE SHARES OUTSTANDING 1,264,626 1,281,924 1,270,625
Outstanding dilutive stock options with option
price less than average market price - 6,083 -
---------------- --------------- ----------------
ADJUSTED WEIGHTED AVERAGE SHARES 1,264,626 1,288,007 1,270,625
---------------- --------------- ----------------
BASIC EARNINGS PER SHARE $(0.96) $ 0.38 $(0.98)
---------------- --------------- ----------------
DILUTED EARNINGS PER SHARE $(0.96) $0.37 $(0.98)
---------------- --------------- ----------------
</TABLE>
Outstanding potentially dilutive stock options which were not included in
the above calculations for the respective fiscal years were as follows:
180,169 in 1999; 138,316 in 1998 and 261,155 in 1997.
(4) TREASURY STOCK TRANSACTIONS
During 1999 and 1998, 3,500 and 2,865 shares, respectively, of Technical
Communications Corporation Common Stock were granted to members of the
Company's Board of Directors at a price per share of $4.00 and $6.38,
which was equal to the current market value on the date of grant. These
shares were issued from the Company's Treasury Stock.
The Company terminated its ESOP on October 1, 1997, and accounted for
this termination in the manner specified in AICPA Statement of Position
(SOP) 93-6, EMPLOYERS' ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS.
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.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) 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.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation," which sets forth a fair-value
based method of recognizing stock- based compensation expense. As
permitted by SFAS 123, the Company has elected to continue to apply
Accounting Principles Board Opinion No. 25 to account for its stock-based
employee compensation plans. Had compensation for awards in fiscal years
1997 through 1999 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 123, the effect on the Company's net income
and earnings per share would have been as follows:
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 3, SEPTEMBER 27,
1999 1998 1997
<S> <C> <C> <C>
Net income (loss)
As reported $(1,218,542) $ 481,603 $ (1,243,501)
Pro forma $(1,549,036) $ 296,646 $ (1,432,295)
Basic earnings (loss) per common share
As reported $(0.96) $0.38 $(0.98)
Pro forma $(1.22) $0.26 $(1.23)
</TABLE>
Because the method prescribed by SFAS 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 4.68%, 4.08%, and 6.00%
for 1999, 1998, and 1997, respectively, expected life equal to 5 years,
expected volatility of 85% in 1999 and 100% in 1998 and 1997, and an
expected dividend yield of 0%.
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
OCTOBER2, OCTOBER3, SEPTEMBER27,
1999 1998 1997
--------------------- ------------------------ -------------------------
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of 144,399 $7.79 261,155 $10.14 233,905 $10.13
year
Options granted
Option Price = Fair Market Value 114,000 $3.91 106,369 $6.58 34,700 $9.33
Option Price > Fair Market Value - - 16,000 $11.45
Option Price < Fair Market Value 7,000 $3.40 - -
Options exercised - (3,100) $4.00 (7,500) $6.90
Options forfeited (9,325) $8.61 (220,025) $9.57 (15,950) $10.92
------- --------- --------
Options outstanding, end of year 256,074 $5.91 144,399 $7.79 261,155 $10.14
Options exercisable 193,924 $5.45 69,029 $8.12 72,965 $9.50
Weighted average fair value per share
of options granted during the year $2.73 $4.65 $7.76
</TABLE>
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following summarizes certain data for options outstanding at October
2, 1999:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
RANGE OF NUMBER OF EXERCISE CONTRACTUAL
EXERCISE PRICES SHARES PRICE LIFE
--------------- ------ ----- ----
<S> <C> <C> <C> <C>
Options outstanding, end of $ 2.63 - $ 5.03 141,000 $ 4.04 8.8
year:
$ 5.04 - $10.05 92,794 $ 7.23 7.7
$ 10.06- $16.75 22,280 $12.30 5.8
------
256,074 $ 5.91 8.2
Options exercisable: $ 2.63 - $ 5.03 127,000 $ 4.12
$ 5.04 - $10.05 57,094 $ 7.12
$ 10.06 - $16.75 9,830 $12.91
-----
193,924 $5.45
(6) INVENTORIES
<CAPTION>
Inventories consist of the following: OCTOBER 2, OCTOBER 3,
1999 1998
<S> <C> <C>
Finished goods $ 655,167 $ 173,141
Work in process 216,072 776,047
Raw materials and supplies 2,164,698 2,170,103
---------------- -----------------
Total inventories $ 3,035,937 $ 3,119,291
---------------- -----------------
(7) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<CAPTION>
OCTOBER 2, OCTOBER 3, ESTIMATED
1999 1998 USEFUL LIFE
<S> <C> <C> <C>
Engineering and manufacturing equipment $2,330,876 $2,221,594 3-8 years
Demonstration equipment 779,732 1,058,550 3 years
Furniture and fixtures 1,089,112 1,079,569 3-8 years
Automobiles 24,385 44,335 3 years
Remaining term
Leasehold improvements 416,117 414,467 of lease
--------------------- ---------------------
Total equipment and
leasehold improvements $4,640,222 $4,818,515 3-8 years
--------------------- ---------------------
(8) OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
<CAPTION>
OCTOBER 2, OCTOBER 3,
1999 1998
<S> <C> <C>
Reserve for product warranty $ 240,462 $ 167,772
Professional service fees 176,803 128,377
Sales representative commissions 131,075 135,514
Deferred revenues - 447,375
Customer support agreements 147,700 914,585
Income taxes payable 3,735 289,513
Other 171,161 158,298
---------------- -----------------
Total other accrued liabilities $ 870,936 $ 2,241,434
---------------- -----------------
</TABLE>
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) DEBT
At October 2, 1999, the Company has a $5,000,000 revolving line of credit
at a rate of prime plus 1/2 of 1% (8.75% at October 2, 1999) 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 October 2, 1999, the Company is in compliance with
these covenants. The amount of borrowings is restricted to a percentage
of certain accounts receivable and inventory balances. Availability under
the line of credit has been reduced by $67,476, as of October 2, 1999, as
a result of standby letters of credit. No other borrowings are
outstanding against the line.
During the year ended October 3, 1998, the Company borrowed $4,500,000
under its line of credit. The Company repaid $2,250,000 during 1998,
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 an outstanding receivable from a
significant sale during 1998.
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 fiscal 1998 by
transferring all remaining shares that had not been allocated to
participants to Treasury Stock.
(10) 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 are
due through June 30, 2000 and amount to $119,000. 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 $157,182 in fiscal year 1999,
$155,300 in fiscal year 1998 and $146,160 in fiscal year 1997.
During 1998, the Company entered into a capital lease for computer
equipment in the amount of $20,370, an additional $3,850 was added to the
lease in fiscal 1999 (accumulated depreciation amounted to $11,468 at
October 2, 1999). This asset 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 two years are $7,216 in 2000 and
$6,144 in 2001.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 3, SEPTEMBER 27,
1999 1998 1997
<S> <C> <C> <C>
Current:
Federal $ (109,625) $ 29,629 $ (294,024)
State (213,184) 26,706 113,495
------------------- ------------------- -------------------
Total current taxes (322,809) 56,335 (180,529)
------------------- ------------------- -------------------
Deferred:
Federal (46,142) 111,641 (16,519)
State (37,228) (7,442) (217,452)
------------------- ------------------- -------------------
Total deferred taxes (83,370) 104,199 (233,971)
------------------- ------------------- -------------------
Total provision (benefit) $ (406,179) $ 160,534 $ (414,500)
------------------- ------------------- -------------------
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:
<CAPTION>
OCTOBER 2, OCTOBER 3, SEPTEMBER 27,
1999 1998 1997
<S> <C> <C> <C>
Tax at U.S. statutory rate $ (552,405) $ 220,210 $ (563,720)
Benefit of Foreign Sales Corp. - (74,269) -
State income taxes,
net of Federal benefit (165,272) 12,714 (103,957)
Other (665) 32,933 (17,912)
Increase (reduction) in
valuation allowance 312,163 (31,054) 271,089
------------------- ------------------- -------------------
Total provision (benefit) $ (406,179) $ 160,534 $ (414,500)
------------------- ------------------- -------------------
Deferred income taxes consist of the following:
<CAPTION>
OCTOBER 2, OCTOBER 3,
1999 1998
<S> <C> <C>
NOL Carryforward $ 639,884 $ -
SFAS 115 investment - (228,000)
Goodwill 35,890 126,671
Inventory reserve 588,479 457,158
Warranty reserve 96,834 67,562
Payroll related accruals 42,529 476,082
Tax credits 179,489 118,902
Other 132,479 75,012
------------------- -------------------
Total 1,715,584 1,093,387
Less: valuation allowance (906,029) (593,866)
------------------- -------------------
Total $ 809,555 $ 499,521
------------------- -------------------
</TABLE>
The valuation allowance relates to uncertainty with respect to the
Company's ability to realize its deferred tax assets. Refundable income
taxes represents estimated refunds from the Federal government from
carryback claims. All refunds are expected to be received within the next
fiscal year.
As of October 2, 1999 the Company has available tax loss carryforwards
for federal income tax purposes of $1,322,892, which expire in 2019. The
Company also has available tax loss carryfowards for state income tax
purposes of $2,581,899, which expire in 2004.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) EMPLOYEE BENEFIT PLANS
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. There were no
Company profit sharing contributions during fiscal 1999, 1998 or 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. The Company's matching contributions were $39,094 and $37,700 in
1999 and 1998, respectively. No matching contributions were made in 1997.
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 by the plan. No bonuses were earned and accrued
under the plan in 1999, 1998 or 1997.
(13) BUSINESS, CREDIT AND OFF-BALANCE SHEET 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, 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.
At October 2, 1999, and October 3, 1998, the Company was contingently
liable under open standby letters of credit totaling $67,476 and
$911,526, respectively. These letters of credit were 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 2, 1999, management believes it has no significant
concentrations of credit risk due to placement of its cash equivalents
with high-credit-quality financial institutions, and the fact that the
majority of its foreign trade receivables are secured by letters of
credit or foreign credit insurance.
(14) RELATED PARTY TRANSACTIONS
During fiscal year 1997, the Company incurred expenses of $116,038, 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.
FutureComms' work ended in August 1997.
On November 19, 1998, the Company reached agreement on 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, of which $300,000 has been
paid as of October 2, 1999, (ii) the dissolution of the 13D Group (Note:
members of the 13D Group filed an amendment to their Form 13D dissolving
the 13D Group in January 1999) and (iii) the former proxy contestants to
abide by certain standstill provisions until October 1, 2000.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) MAJOR CUSTOMERS AND EXPORT SALES
In fiscal 1999, the Company had three customers, representing 60% (32%,
17% and 11%) of net 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, representing 51% (25%, 13% and 13%) of net sales.
A breakdown of net sales is as follows:
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 3, SEPTEMBER 27,
1999 1998 1997
<S> <C> <C> <C>
Domestic $1,239,275 $ 1,631,459 $ 2,734,690
Foreign 5,194,408 12,224,322 9,523,948
---------- ----------- -----------
Total Sales $6,433,683 $13,855,781 $12,258,638
---------------------------------- ---------------------- --------------------- ----------------------
A summary of foreign sales by geographic area follows:
<CAPTION>
OCTOBER 2, OCTOBER 3, SEPTEMBER 27,
1999 1998 1997
<S> <C> <C> <C>
North America
(excluding the U.S.) 1.0% 0.1% 1.0%
Central and South America 1.0% 5.0% 33.8%
Europe 14.2% 4.2% 6.1%
Mid-East and Africa 82.6% 84.4% 53.8%
Far East 1.2% 6.3% 5.3%
</TABLE>
(16) 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. 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.
(17) SALE OF INVESTMENT IN VISUAL NETWORK, INC. COMMON STOCK
During 1999, the Company sold its investment in Visual Network, Inc.
common stock. The Company recognized a gain on the sale of $1,151,172 on
a cost basis of $250,800. The Company's investment in Visual Network's
Common Stock followed the merger of Net2Net into Visual Networks, Inc. on
May 15, 1998. This investment was carried as an available-for-sale
investment in the October 3, 1998 balance sheet, at market value. At
October 3, 1998, the market value of the 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.
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.
F-13
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
For the years ended October 2, 1999, and October 3, 1998:
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
FISCAL 1999 JANUARY 2, 1999 APRIL 3, 1999 JULY 3, 1999 OCTOBER 2, 1999
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 1,071,356 $ 1,247,336 $ 1,361,671 $ 2,753,320
Gross profit 689,806 714,414 670,818 1,230,154
Net income (loss) (988,388) 147,100 (593,927) 216,673
Net income (loss) per share (1)
Basic $ (.79) $ .12 $ (.47) $ .17
Diluted $ (.79) $ .12 $ (.47) $ .17
- ---------------------------------------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
FISCAL 1998 DECEMBER 27, 1997 MARCH 28, 1998 JUNE 27, 1998 OCTOBER 3, 1998
- ---------------------------------------------------------------------------------------------------------
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 income (loss) (128,719) 178,142 222,415 209,765
Net income (loss) per share
Basic $ (.10) $ .14 $ .17 $.16
Diluted $ (.10) $ .14 $ .17 $.16
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) As a result of a miscalculation of weighted average shares during
each of the first three quarters of 1999, net income (loss) per share was
misstated in the 10Q filings. Quarterly earnings (loss) amounts were
understated in amounts ranging from $.01 to $.04 and year to date amounts
from $.04 to $.07. The corrected amounts are reflected in the table
above.
F-14
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Technical Communications
Corporation:
We have audited the accompanying consolidated balance sheets of Technical
Communications Corporation (a Massachusetts corporation) and subsidiaries as of
October 2, 1999 and October 3, 1998 and the related consolidated statements of
operations, cash flows, and comprehensive income (loss) and stockholders' equity
for the years ended October 2, 1999, October 3, 1998 and September 27, 1997.
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 2, 1999 and October 3,
1998 and the results of their operations and their cash flows for the years
October 2, 1999, October 3, 1998 and September 27, 1997, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
November 5, 1999
F-15
<PAGE>
TECHNICAL COMMUNICATIONS CORPORATION SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS DEDUCTIONS BALANCE AT
BEGINNING CHARGED TO FROM END
OF YEAR EXPENSE RESERVES OF YEAR
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year Ended October 2, 1999 $ 70,000 -- -- $ 70,000
Year Ended October 3, 1998 25,000 $ 187,075 $ 142,075 70,000
Year Ended September 27, 1997 53,707 -- 28,707 25,000
</TABLE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE TO THE
CONSOLIDATED FINANCIAL STATEMENTS
To the Shareholders and Board of Directors of Technical Communications
Corporation:
We have audited, in accordance with generally accepted auditing standards, the
supplemental schedule of Valuation and Qualifying Accounts listed as Schedule II
above, and have issued our report thereon dated November 5, 1999. Our audit was
made for the purpose of forming an opinion on the basic consolidated financial
statements taken as a whole. The supplemental schedule to the consolidated
financial statements listed as Schedule II is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This supplemental schedule has been subjected
to the auditing procedures applied in the audit of the basic consolidated
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
Boston, Massachusetts
November 5, 1999
S-1
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES:
TCC Foreign Sales Corporation
TCC Investment Corporation
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-START> OCT-03-1998
<PERIOD-END> OCT-02-1999
<CASH> 2,338,935
<SECURITIES> 0
<RECEIVABLES> 2,673,401
<ALLOWANCES> 70,000
<INVENTORY> 3,035,937
<CURRENT-ASSETS> 9,148,853
<PP&E> 4,640,222
<DEPRECIATION> 3,960,614
<TOTAL-ASSETS> 10,660,915
<CURRENT-LIABILITIES> 1,359,657
<BONDS> 0
0
0
<COMMON> 129,454
<OTHER-SE> 8,806,083
<TOTAL-LIABILITY-AND-EQUITY> 10,660,915
<SALES> 6,433,683
<TOTAL-REVENUES> 7,756,432
<CGS> 3,128,491
<TOTAL-COSTS> 3,128,491
<OTHER-EXPENSES> 6,248,021
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,641
<INCOME-PRETAX> (1,624,721)
<INCOME-TAX> (406,179)
<INCOME-CONTINUING> (1,218,542)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,218,542)
<EPS-BASIC> (0.96)
<EPS-DILUTED> (0.96)
</TABLE>
