<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
---
Exchange Act of 1934 for the quarterly period ended July 1, 2000 or
Transition report pursuant to Section 13 or 15(d) of the Securities
---
Exchange Act of 1934 for the transition period _____ to _____
Commission File Number: 000-08588
TECHNICAL COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2295040
------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
100 DOMINO DRIVE, CONCORD, MA 01742-2892
---------------------------------------- ----------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (978) 287-5100
--------------
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Number of shares of Common
Stock, $.10 par value, outstanding as of August 11, 2000: 1,312,513.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets,
as of July 1, 2000 (unaudited) and October 2, 1999 1
Condensed Consolidated Statements of Operations,
Three (3) months ended July 1, 2000 and July 3, 1999
(unaudited), 2
Nine (9) months ended July 1, 2000 and July 3, 1999 (unaudited), 3
Condensed Consolidated Statements of Cash Flows,
Nine (9) months ended July 1, 2000 and July 3, 1999 (unaudited) 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II Other Information 9
Signatures 10
</TABLE>
<PAGE>
PART I. Financial Information - Item 1. Financial Statements
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
JULY 1, 2000 OCTOBER 2, 1999
------------ ---------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $3,729,744 $ 2,338,935
Accounts receivable - trade, less allowance for
doubtful accounts of $70,000 507,585 2,603,401
Inventories 2,840,435 3,035,937
Deferred income taxes 692,085 809,555
Other current assets 200,807 361,025
Total current assets 7,970,656 9,148,853
Equipment and leasehold improvements 4,891,049 4,640,222
Less: accumulated depreciation and amortization 4,254,653 3,960,614
------------ --------------
636,396 679,608
Goodwill 1,614,131 1,614,131
Less: accumulated amortization 1,092,534 931,352
------------ --------------
521,597 682,779
Other assets 15,633 149,675
------------ --------------
$9,144,282 $10,660,915
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 236,412 $ 258,067
Accrued liabilities
Compensation and related expenses 451,300 230,654
Other 104,801 870,936
------------ --------------
Total current liabilities 792,513 1,359,657
Other long-term liabilities 359,229 365,721
Commitments and contingencies
Stockholders' Equity:
Common stock, par value $.10 per share;
authorized 3,500,000 shares; issued and
outstanding 1,312,153 and 1,294,541 shares 131,215 129,454
Treasury stock at cost, 19,468 and 27,063 shares (160,106) (213,375)
Additional paid-in capital 1,341,742 1,305,870
Retained earnings 6,679,689 7,713,588
------------ --------------
Total stockholders' equity 7,992,540 8,935,537
------------ --------------
$9,144,282 $10,660,915
============ ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
Page 1
<PAGE>
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
JULY 1, 2000 JULY 3, 1999
------------ ------------
<S> <C> <C>
Net sales $ 744,010 $1,361,671
Cost of sales 433,561 690,853
------------ ------------
Gross profit 310,449 670,818
Operating expenses:
Selling, general and
administrative expenses 1,092,710 1,043,694
Product development costs 291,139 453,850
------------ ------------
Total operating expenses 1,383,849 1,497,544
------------ ------------
Operating loss (1,073,400) (826,726)
------------ ------------
Other income (expense):
Interest income 59,156 38,208
Interest expense (559) (426)
Other 9,779 (2,959)
------------ ------------
Total other income: 68,376 34,823
------------ ------------
Loss before income taxes (1,005,024) (791,903)
Provision (benefit) for income taxes (301,507) (197,976)
------------ ------------
Net loss $ (703,517) $(593,927)
============ ============
Net loss per common share:
Basic $ (0.54) $ (0.43)
Diluted $ (0.54) $ (0.43)
Weighted average common shares
outstanding used in computation:
Basic 1,292,685 1,376,951
Diluted 1,292,685 1,376,951
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
Page 2
<PAGE>
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
JULY 1,2000 JULY 3, 1999
----------- ------------
<S> <C> <C>
Net sales $ 4,378,463 $ 3,680,363
Cost of sales 1,946,041 1,598,165
----------- ------------
Gross profit 2,432,422 2,082,198
Operating expenses:
Selling, general and
administrative expenses 3,148,071 3,605,168
Product development costs 919,454 1,546,118
----------- ------------
Total operating expenses 4,067,525 5,151,286
----------- ------------
Operating loss (1,635,103) (3,069,088)
----------- ------------
Other income (expense):
Gain on sale of investment - 1,056,638
Interest income 163,869 114,350
Interest expense (1,127) (4,074)
Other 22,447 (11,447)
----------- ------------
Total other income: 185,189 1,155,467
----------- -------------
Loss before income taxes (1,449,914) (1,913,621)
Provision (benefit) for income taxes (434,975) (478,405)
----------- ------------
Net loss $(1,014,939) $ (1,435,216)
=========== ============
Net loss per common share:
Basic $ (0.79) $ (1.07)
Diluted $ (0.79) $ (1.07)
Weighted average common shares outstanding
used in computation:
Basic 1,287,528 1,344,063
Diluted 1,287,528 1,344,063
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
Page 3
<PAGE>
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
JULY 1, 2000 JULY 3, 1999
------------ ------------
<S> <C> <C>
Operating Activities:
Net loss $(1,014,939) $(1,435,216)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization 589,263 605,896
Non-cash compensation 34,309 14,677
Deferred income taxes 117,121 -
Gain on sale of investment - (1,056,638)
Changes in assets and liabilities:
Accounts receivable 2,095,816 7,701,501
Inventories 195,502 (788,711)
Refundable income taxes 276,960 75,840
Other current assets ( 116,742) ( 37,947)
Accounts payable and other accrued liabilities (573,288) (1,619,090)
------------ ------------
Net cash provided by operating activities 1,604,003 3,460,312
------------ ------------
Investing Activities:
Additions to equipment and leasehold improvements (250,827) (15,119)
Proceeds from sale of investment - 1,288,633
Other (2,540)
-
Net cash (used) provided by investing activities (250,827) 1,270,974
------------ ------------
Financing Activities:
Proceeds from stock issuance 37,633 40,803
Payment of line of credit - (2,250,000)
------------ ------------
Net cash provided (used) by financing activities 37,633 (2,209,197)
Net increase in cash and cash equivalents 1,390,809 2,522,089
Cash and cash equivalents at beginning of the period 2,338,935 740,049
------------ ------------
Cash and cash equivalents at the end of the period $ 3,729,744 $3,262,138
============ ============
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 701 $20,256
Income taxes paid (refunds received), net (394,430) 64,051
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
Page 4
<PAGE>
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
NOTE: THE DISCUSSIONS IN THIS FORM 10-Q, 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 RATES AND THE COMPANY'S ABILITY TO NEGOTIATE A LINE OF CREDIT WITH ITS
BANKS. THESE AND OTHER RISKS ARE DETAILED FROM TIME TO TIME IN THE COMPANY'S
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE FORM 10-K FOR
THE FISCAL YEAR ENDED OCTOBER 2, 1999, THE FORM 10-Q FOR THE QUARTERS ENDED
JANUARY 1, 2000 AND APRIL 1, 2000 AND THIS FORM 10-Q FOR THE QUARTER ENDED JULY
1, 2000.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STATEMENT OF FAIR PRESENTATION
INTERIM FINANCIAL STATEMENTS. The accompanying unaudited condensed consolidated
financial statements include all adjustments (consisting only of normal
recurring accruals) which are, in the opinion of management, necessary for fair
presentation of the results of operations for the periods presented. Interim
results are not necessarily indicative of the results to be expected for a full
year.
Certain disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted as allowed by Form 10-Q. The accompanying unaudited consolidated
financial statements should be read in conjunction with the Company's
consolidated financial statements for the year ending October 2, 1999 as filed
with the Securities and Exchange Commission on Form 10-K.
NOTE 1. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JULY 1, 2000 OCTOBER 2, 1999
------------ ---------------
<S> <C> <C>
Finished Goods $ 586,561 $ 655,167
Work in Process 351,785 216,072
Raw Materials 1,902,089 2,164,698
----------- ------------
$ 2,840,435 $ 3,035,937
=========== ===========
</TABLE>
Page 5
<PAGE>
NOTE 2. LONG-TERM DEBT
In August 2000, the Company successfully negotiated a new $5 million
asset-based credit facility with Coast Business Credit. The line carries an
interest rate of prime plus 1/2% (9.75% at July 1, 2000). This revolving line
of credit is collateralized by substantially all the assets of the Company
and requires no compensating balances. There is one financial covenant
associated with the line, which calls for a minimum net tangible worth
starting at $6,250,000 and increasing over time based on certain criteria.
The amount of borrowings is limited to a percentage of certain accounts
receivable and inventory balances. The line matures in August 2003. The
Company believes this new credit facility will meet its current credit needs
and its need for the foreseeable future.
Previously the Company had a $5,000,000 revolving line of credit with Wainwright
Bank and Trust Company at an interest rate of the bank's base rate plus 1/2 of
1%. This line of credit was secured by a pledge of substantially all the assets
of the Company. This line matured on May 1, 2000 and was not renewed. As of July
1, 2000, the Company has outstanding standby letters of credit, which were
supported by the line of credit amounting to $88,355. Wainwright Bank has agreed
to honor these standby letters of credit until they mature at various dates
through October 31, 2000.
NOTE 3. COMMITMENTS AND CONTINGENCIES
The Company was the defendant in GERARD v. TECHNICAL COMMUNICATIONS CORPORATION,
ET AL., filed in the Superior Court of the Commonwealth of Massachusetts in
1999. This case arose 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.
During the second quarter the Company settled this lawsuit. 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.
PART I, Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
The Company is in the business of designing, manufacturing and marketing
communications security equipment. The Company receives orders for equipment
from customers, which may take several months or longer to manufacture and ship.
With the exception of long-term contracts where revenue is recognized under the
percentage of completion method, the Company generally recognizes income on a
unit-of-delivery basis. This latter method can cause revenues to vary widely
from quarter to quarter and therefore quarterly comparisons of revenue may not
be indicative of any trend.
THREE MONTHS ENDED JULY 1, 2000 AS COMPARED TO THE THREE MONTHS
ENDED JULY 3, 1999
Net sales for the quarters ended July 1, 2000 and July 3, 1999, were $744,000
and $1,362,000 respectively. This decrease of 45% is attributed to variability
in revenue recognition as a result of the timing of shipments and the receipt of
anticipated orders. Including an anticipated order totaling approximately
$600,000, which was received several days subsequent to the close of the
quarter.
Page 6
<PAGE>
Gross profit for the second quarter of fiscal 2000 was $310,000 as compared to
gross profit of $671,000 for the same period of fiscal year 1999. This
represented a 54% decrease in gross profit for the quarter, primarily
attributable to the decrease in revenues and the mix of products sold. Gross
profit expressed as a percentage of sales was 42% in 2000 as compared to 49% for
the same period in fiscal year 1999.
Selling, general and administrative expenses for the second quarter of fiscal
2000 were $1,093,000, which were substantially the same as the $1,044,000 of
expenses for the same period in fiscal 1999.
Product development costs for the quarter ended July 1, 2000 were $291,000
compared to $454,000 for the same period in fiscal 1999. This decrease of 36%
was attributable to a shift in development work from internal product
development to billable product development.
The Company incurred a net loss of $704,000 for the third quarter of fiscal 2000
as compared to net loss of $594,000 for the same period in fiscal 1999. Included
in the net loss for the third quarter of fiscal 2000 is a loss from operations
of $1,073,000 as compared to an operating loss of $827,000 in 1999. The decrease
in operating profitability is primarily attributable to the decrease in gross
profit and partially offset by the decrease in operating spending as described
above.
NINE MONTHS ENDED JULY 1, 2000 AS COMPARED TO THE NINE MONTHS
ENDED JULY 3, 1999
Net sales for the nine months ended July 1, 2000 and July 3, 1999, were
$4,378,000 and $3,680,000, respectively. This increase of 19% is attributed to
variability in revenue recognition as a result of the timing of shipments and
the receipt of anticipated orders. The strengthening of economic conditions in
many countries has contributed to an increased order flow from our traditional
international government markets.
Gross profit for the first nine months of fiscal 2000 was $2,432,000 as compared
to gross profit of $2,082,000 for the same period of fiscal year 1999. This
represented a 17% increase in gross profit for the period. Gross profit
expressed as a percentage of sales decreased to 56% in 2000 from 57% as compared
to the same period in fiscal year 1999.
Selling, general and administrative expenses for the first nine months of
fiscal 2000 and 1999 were $3,148,000 and $3,605,000, respectively. This
decrease of 13% was primarily attributable to approximately $475,000 in costs
associated with the settlement of litigation in fiscal 1999 and was offset by
$147,000 in costs associated with the settlement of litigation discussed in
Note 3 to the financial statements. In addition, there were decreases in
costs associated with a reduction in marketing costs associated with new
product development of approximately $56,000 and the timing of trade shows
also resulted in a reduction in spending of approximately $40,000.
Product development costs for the nine months ended July 1, 2000 were $919,000
compared to $1,546,000 for the same period in fiscal 1999. This decrease of 41%
was attributable to a shift in development work from internal product
development to billable product development.
The Company showed a net loss of $1,015,000 for the first nine months of fiscal
2000 as compared to a net loss of $1,435,000 for the same period in fiscal 1999.
The improvement in profitability is primarily attributable to the increased
sales, the increase in gross profit and the decrease in operating spending as
described above.
YEAR 2000 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.
The Company 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 consisted of an
inventory of potentially affected systems, an assessment of Y2K readiness and
corrective action deployment. As of the date of this report, the Company has
completed these year 2000 initiatives.
Page 7
<PAGE>
As a result of completing these initiatives, the Company believes that all of
its material information technology systems and critical non-information
technology systems are year 2000 compliant. The Company believes that all of the
material products that it currently manufactures and sells are year 2000
compliant and not date sensitive. In addition, the Company is not aware of any
significant vendor that has experienced material disruption due to year 2000
issues. As of the date of this report, the Company has incurred expenses related
to the year 2000 problem, since April 1998, of approximately $63,000. The main
portion of these costs relates to the evaluation and testing of products for Y2K
compliance. We will continue to monitor our systems and vendors to ensure that
issues do not arise in the coming months. Although we do not anticipate any
future significant business interruption, we can give no assurance that such
interruption will not occur.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. 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 short-term investments increased by $1,391,000 or 67% to $3,730,000 as
of July 1, 2000, from a balance of $2,339,000 at October 2, 1999. This increase
was primarily due to the reduction of accounts receivable and inventory. The
current ratio increased to 10:1 at July 1, 2000 compared to 6.7:1 as of October
2, 1999, primarily as a result of the cash received on accounts receivable
during the year.
In August 2000, the Company successfully negotiated a new $5 million
asset-based credit facility with Coast Business Credit. The line carries an
interest rate of prime plus 1/2% (9.75% at July 1, 2000). This revolving line
of credit is collateralized by substantially all the assets of the Company
and requires no compensating balances. There is one financial covenant
associated with the line, which calls for a minimum net tangible worth
starting at $6,250,000 and increasing over time based on certain criteria.
The amount of borrowings is limited to a percentage of certain accounts
receivable and inventory balances. The line matures in August 2003. The
Company believes this new credit facility will meet its current credit needs
and its need for the foreseeable future.
Previously the Company had a $5,000,000 revolving line of credit with Wainwright
Bank and Trust Company at an interest rate of the bank's base rate plus 1/2 of
1%. This line of credit was secured by a pledge of substantially all the assets
of the Company. This line matured on May 1, 2000 and was not renewed. As of July
1, 2000, the Company has outstanding standby letters of credit, which were
supported by the line of credit amounting to $88,355. Wainwright Bank has agreed
to honor these standby letters of credit until they mature at various dates
through October 31, 2000.
Management anticipates no unusual capital expenditures during the remainder of
fiscal 2000.
Page 8
<PAGE>
PART II. Other Information
ITEM 1. LEGAL PROCEEDINGS:
The Company was the defendant in GERARD v. TECHNICAL COMMUNICATIONS CORPORATION,
ET AL., filed in the Superior Court of the Commonwealth of Massachusetts in
1999. This case arose 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.
During the second quarter the Company settled this lawsuit. An earlier complaint
brought by Mr. Gerard in the Federal court, which included the state claims, and
a federal securities claim was dismissed in July 1999; the securities claims
were dismissed with prejudice.
Item 2. Changes in Securities and Use of Proceeds:
Not applicable.
Item 3. Defaults Upon Senior Securities:
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders:
None.
Item 5. Other Information:
None.
Item 6. Exhibits and Reports on Form 8-K:
a. Exhibits:
Exhibit 27: Financial Data Schedule
b. Reports on Form 8-K:
During the quarter the registrant filed one (1) Form 8-K on June 16,
2000, with respect to a change of auditors.
Page 9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHNICAL COMMUNICATIONS CORPORATION
(Registrant)
AUGUST 14, 2000 By:/s/ CARL H. GUILD, JR.
--------------- --------------------------------
Date Carl H. Guild, Jr., President and
Chief Executive Officer
AUGUST 14, 2000 By:/s/ MICHAEL P. MALONE
--------------- --------------------------------
Date Michael P. Malone, Chief
Financial Officer
Page 10
