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1
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
September 30, 2000 0-8588
------------------ ------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_______________TO_______________.
Technical Communications Corporation
------------------------------------
(Exact name of registrant as specified in its charter)
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<S> <C>
Massachusetts 04-2295040
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
</TABLE>
100 Domino Drive, Concord, MA 01742-2892
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(Address of principal executive offices) (Zip code)
(978) 287-5100
-------------------------------
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12 (b) of the Act:
None None
------------------------------- ----------------------------
(Title of each class) (Name of each exchange
on which registered)
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.10 Par Value
----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ____
----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Based on the closing price of the stock as of December 15, 2000, 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 15, 2000, was
approximately $2,451,352.
The number of shares of the registrant's Common Stock, par value $ .10 per
share, outstanding as of December 15, 2000, was 1,308,291.
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2
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 SEPTEMBER 30, 2000.
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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3
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 x 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 x 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. The Cipher x 7200 has been awarded Federal
Information Processing Standard (FIPS 140-1) Level 3 certification, which allows
the product to compete for US and Canadian federal security acquisition, which
require FIPS 140-1 Compliance.
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 have greater financial and other resources than
the Company. The Company believes its principal competitors include Crypto AG,
Racal Electronics Plc, Cylink Corporation, Motorola Inc., Omnisec AG, Cisco
Systems, SafeNet, Inc. and TimeStep Corporation.
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4
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 2000, the Company had two customers, representing 41% (21%
and 20%) of net 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.
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 September 30, 2000 was
approximately $400,000, compared to approximately, $2,000,000 as of October 2,
1999. The Company expects to deliver substantially its entire backlog in fiscal
year 2001.
(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.
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5
(i) Research and Development
------------------------
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 and train such technical management and sales personnel.
During the twelve-month periods ended September 30, 2000, October 2, 1999 and
October 3, 1998, the Company spent $1,156,692, $1,935,859 and $1,414,746,
respectively, on product development. In addition, product development is also,
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 September 30, 2000, the Company employed, approximately 50
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 2000 and 1999
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.
When there is a tax advantage to the Company, export sales are
conducted through its wholly owned subsidiary, TCC Foreign Sales Corporation
(TCC FSC). TCC FSC 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 renewed the lease on its headquarters located in
Concord, Massachusetts through December 31, 2002. Future minimum lease payments
amount to $171,216 in fiscal 2001, $171,216 in fiscal 2002 and $42,804 in fiscal
2003. 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 lease 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.
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6
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 fiscal year 2000 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on February
7, 2000. 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 1,174,858 votes in favor, 45,777 votes against and -0- votes
abstaining.
The ratification of the Company's auditors was approved with 1,164,186
votes in favor, 7,942 votes against and 1,700 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.
Price
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Title of Class Quarter Ending Low High
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Common Stock,
$.10 par value
1/1/2000 2.563 7.500
4/1/2000 5.188 10.813
7/1/2000 2.375 6.125
9/30/2000 2.531 3.969
01/02/99 3.375 6.000
04/03/99 2.375 4.500
07/03/99 1.625 3.375
10/02/99 2.250 3.125
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 15, 2000, there were approximately 1,200 record holders
of Common Stock, $ .10 par value. On December 15, 2000, the closing price of the
Common Stock was $2.00.
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Item 6. SELECTED FINANCIAL DATA
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<CAPTION>
Selected Financial Data:
Fiscal Years Ended:
September 30, October 2, October 3, September 27, September 28,
2000 1999 1998 1997 1996
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Net Sales:
Domestic $ 2,446,083 $ 1,239,275 $ 1,631,459 $ 2,734,690 $ 3,633,425
Foreign (Note A) 3,128,025 5,194,408 12,224,322 9,523,948 10,379,377
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Total net sales $ 5,574,108 6,433,683 13,855,781 12,258,638 14,012,802
Gross profit 3,197,675 3,305,192 8,393,173 7,104,975 8,231,388
Net income (loss) (1,740,314) (1,218,542) 481,603 (1,243,501) 532,147
Net income (loss) per share
of common stock
Basic $ (1.35) $ (.96) $ .38 $ (.98) $ .42
Diluted $ (1.35) $ (.96) $ .37 $ (.98) $ .41
Weighted average
shares outstanding
Basic 1,289,523 1,264,626 1,281,924 1,270,625 1,257,384
Diluted 1,289,523 1,264,626 1,288,007 1,270,625 1,298,387
</TABLE>
<TABLE>
<CAPTION>
As of:
September 30, October 2, October 3, September 27, September 28,
2000 1999 1998 1997 1996
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<S> <C> <C> <C> <C> <C>
Assets $ 8,402,717 $10,660,915 $16,172,729 $12,892,899 $16,000,033
Line of credit/current portion,
long-term debt (B) - - 2,250,000 - 1,145,175
Long-term obligations - - - - 1,200,000
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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) At October 3, 1998, amount represents outstanding borrowings against line of
credit.
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8
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 September 30, 2000.
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.
As a result of these efforts, 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 or are not date
sensitive. In addition, the Company is not aware of any significant vendor that
has experienced material disruption due to year 2000 issues. 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.
Results of Operations
---------------------
FISCAL 2000 COMPARED TO FISCAL 1999
-----------------------------------
Consolidated net sales for the year ended September 30, 2000, were $5,574,000
compared with sales of $6,434,000 for the prior fiscal year. This decrease of
$860,000, or 13%, is mainly attributed to a delay in the receipt of anticipated
orders.
Gross profit for fiscal year 2000 was $3,198,000, compared to $3,305,000 in
fiscal 1999, a decrease of 3%. Gross profit expressed as a percentage of sales
was 57% in fiscal 2000 compared to 51% in the prior year, which was primarily
due to the lower sales volume, improved product mix and tighter cost controls.
Selling, general and administrative expenses decreased 10% from $4,312,000 in
fiscal 1999 to $3,874,000 for the year just ended, 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 16 to the financial statements. In addition
payroll and other administrative costs have decreased due to the continued
emphasis on expense controls.
Product development costs in fiscal 2000 were $1,157,000, compared to $1,936,000
in fiscal 1999. The $779,000, or 40%, decrease was primarily attributable to a
shift in development work from internal product development to billable product
development.
<PAGE>
Investment income earned during fiscal 2000 was $267,000, compared to $1,318,000
in fiscal 1999. Included in investment income for fiscal 1999 is a one-time gain
on the sale of an investment of $1,151,000.
The Company showed a net loss of $1,740,000 for fiscal 2000 as compared to a net
loss of $1,219,000 for the same period in fiscal 1999. The decrease in
profitability is primarily attributable to the decreased sales, which was
partially offset by the decrease in operating spending as described above.
However, the current year did not recognize any income tax benefit associated
with the current year loss and in addition included a write down of the previous
years net deferred tax asset by $173,000 due to continued losses affecting the
Company's ability to recognize future benefit from the carryforward of net
operating losses. The 1999 income tax benefit amounted to $406,000.
The effects of inflation and changing costs have not had a significant impact on
sales or earnings in recent years. As of September 30, 2000, 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 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 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
fiscal 1999.
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.
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Recent Accounting Pronouncements
---------------------------------
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB No.
101"), "Revenue Recognition in Financial Statements." SAB No. 101 provides
guidance on applying generally accepted accounting principles to revenue
recognition, presentation and disclosure in financial statements. Subsequently,
the SEC has amended the implementation dates so that the Company is required to
adopt the provisions of SAB No. 101 in the fourth quarter of 2001. We are
currently reviewing the impact of SAB No. 101, but we believe that it will not
materially affect the Company's results of operations or financial position.
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. In June 2000, SFAS No. 133 was amended by
Statement of Financial Accounting Standards No. 138 (SFAS 138), "Accounting for
Derivative Instruments and Hedging Activities - an amendment of FASB Statement
No. 133. Management does not expect the adoption of these statements to have a
material impact on its financial position or results of operations.
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents increased by $783,000 or 33% to $3,122,000 as of
September 30, 2000, from a balance of $2,339,000 at October 2, 1999. This
increase was primarily due to the reduction of accounts receivable, which were
partially offset by operating losses and a reduction in current liabilities.
The current ratio remained substantially the same at 6.6:1 at September 30, 2000
compared to 6.7:1 as of October 2, 1999.
In August 2000, the Company successfully negotiated a new $5 million asset-based
credit facility with Coast Business Credit ("Coast"). The line carries an
interest rate of prime plus 1/2% (10.0% at September 30, 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. At September 30, 2000 the Company was in default of the
net worth covenant. Subsequently, Coast waived the default and modified the
agreement to reduce the minimum net worth requirement for the future and added
an interest coverage ratio requirement. In addition, Coast has suspended the
Company's ability to request loans, of up to $500,000, against inventory
balances. The line matures in August 2003. The Company believes this new credit
facility, as amended 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
September 30, 2000, the Company has outstanding standby letters of credit, which
were supported by the line of credit amounting to $20,879. Wainwright Bank has
agreed to honor these standby letters of credit until they mature on December
31, 2000.
The Company's revenues have historically included significant transactions with
foreign governments and other organizations. The Company expects this trend to
continue. The timing of these transactions has in the past and will in the
future impact the cash flow of the Company. Although the Company believes there
are currently sufficient cash and available funds under the line of credit to
meet its working capital needs, delays in the timing of significant transactions
may cause the Company to reevaluate and adjust its operations.
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is in the area of interest rate risk.
The Company's investment portfolio of cash equivalents is subject to interest
rate fluctuations, but the Company believes this risk is immaterial due to the
short-term nature of these investments. The Company may face exposure to
movements in foreign currency exchange rates. Currently, all of the Company's
business outside the United States is conducted in U.S. dollar-denominated
transactions.
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 49
Class I Director
David A. B. Brown (2) (8) 1998 Director 57
Class II Director
Mitchell B. Briskin (3) 1998 Director 41
Class I Director
Carl H. Guild, Jr. (4) 1997 Director, Vice Chairman of the 56
Class III Director Board, Chief Executive Officer
and President
Donald Lake (5) 1998 Director 56
Class III Director
Robert T. Lessard (6) 1997 Director 60
Class II Director
Thomas E. Peoples (7) 1998 Director 52
Class III Director
</TABLE>
<PAGE>
(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.
(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 Principal at Stonebridge Associates LLP, where he has worked
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.
Name and Year Positions and Offices with
First Became an Officer the Company Age
----------------------- ----------- ---
John I. Gill (1) 1985 Executive Vice President 60
Michael P. Malone (2) 1998 Chief Financial Officer/ 41
Treasurer/Assistant secretary
<PAGE>
(1) Mr. Gill has been employed by the Company since August 1983.
(2) Mr. Malone has been employed by the Company since November 1998.
(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 reports of ownership and
changes in ownership with the Securities and Exchange Commission. Officers,
directors and greater than ten percent (10%) beneficial owners are required by
regulation to furnish the Company with copies of all Section 16(a) reports 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
2000, 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 4 by the Company's
Chairman, Dr. M. Mahmud 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 2000 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) 2000 $195,720 - $ 9,198(5)
Chief Executive Officer and President 1999 $199,680 - $ 4,814(6)
1998 $126,548 - $125,502(7)
John I. Gill 2000 $126,583 - $ 1,133(1)
Executive Vice President 1999 $119,745 $19,700(3) $ 1,797(1)
1998 $118,591 - $ 1,493(1)
Michael P. Malone (8) 2000 $106,734 - $ 1,601(2)
Chief Financial Officer 1999 $ 84,349 - $ 1,118(2)
</TABLE>
(1) Represents the Company's 25% match on the first 6% of Mr. Gill's fiscal
year 401(k) contribution.
(2) Represents the Company's 25% match on the first 6% of Mr. Malone's fiscal
year 401(k) contribution.
(3) This amount of $19,700 was paid to Mr. Gill for services rendered in
fiscal year 1998.
<PAGE>
(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.
(5) Includes income realized upon receipt of Company stock of $6,800 as a
result of grants on November 18, 1999, February 7, 2000 and August 3,
2000 by the Company's Board of Directors and $2,398 representing the
Company's 25% match on the first 6% of Mr. Guild's 2000 fiscal year
401(k) contribution.
(6) 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.
(7) 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 $1,498 for the Company's
25% match on the first 6% of Mr. Guild's fiscal 1998 401(k) contribution.
(8) Mr. Malone joined the Company during fiscal year 1999.
(b) Stock Options
-------------
Set forth below is an Option/SAR Grants table concerning individual grants of
stock options and SARs made during fiscal 2000 to each of the named executive
officers.
Options/SAR Grants in Fiscal Year 2000
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Options/SARs Exercise
Underlying Options/ Granted to Employees of Base Expiration
SARs Granted (1) Price ($/sh) Date
------------ --- ------------ ----
<S> <C> <C> <C> <C>
Carl H. Guild, Jr. 1,000 (2) 3.7% 5.100 2/7/2005
John I. Gill 5,000 (3) 18.5% 7.125 1/24/2010
</TABLE>
(1) Options to purchase a total of 27,000 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 February 7, 2000 are exercisable immediately.
(3) Common Stock options, which were granted to Mr. Gill under the 1991 Plan on
January 24, 2000 are exercisable 20% per year over five years.
Set forth below is a table concerning each exercise of stock options (or tandem
SARs) and freestanding SARs during fiscal 2000 by each of the named executive
officers and the value at September 30, 2000 of unexercised options and SARs.
<PAGE>
Aggregated Option/SAR Exercises for Fiscal Year Ended September 30, 2000 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
Name Exercise Realized Exercisable Not Exercisable Exercisable Not Exercisable
---- -------- -------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Carl H. Guild, Jr. - - 154,945 (2) 18,000 (3) - -
John I. Gill - - 1,000 (4) 4,000 (6) - -
Michael P. Malone - - 2,000 (5) 3,000 (7) - -
</TABLE>
--------------------------------------------------------------------------------
(1) Value is based on the difference between the option exercise price and
the fair market value at September 30, 2000 ($2.75 per share)
multiplied by the number of shares underlying the in-the-money portion
of the option. In the money options are those options for which the
fair market value of the underlying common stock is greater than the
exercise price of the option.
(2) This represents exercisable 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, 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 (iii) 4,000 shares on May 1, 2000 at an
exercise price of $10.74 per share; 40,000 shares granted on February
16, 1998 at the following exercise dates and prices: (i) 20,000 shares
on February 16, 1998 at an exercise price of $5.000 per share: (ii)
10,000 shares on February 16, 1999 at $6.05 per share; and (iii)
10,000 shares on February 16, 2000 at an exercise price of $5.50; 945
shares granted on August 14, 1998 at an exercise price of $5.42 per
share; 100,000 shares granted on November 18, 1998 at an exercise
price of $4.00 per share; 1,000 shares granted on February 8, 1999 at
an exercise price of $3.40 per share and 1,000 shares granted on
February 7, 2000 at an exercise price of $5.10 per share.
(3) This represents unexercisable 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, 2001 at an exercise price
of $11.81 per share and (ii) 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 10,000 shares granted on
February 16, 1998, which vest on February 16, 2001 at $6.66 per share.
(4) This represents exercisable grants of options under the 1991 Plan to
buy 1,000 shares granted on January 24, 2000 at an exercise price of
$7.125 per share.
(5) This represents exercisable grants of options under the 1991 Plan to
buy 2,000 shares granted on November 30, 1998 at an exercise price of
$4.00 per share.
(6) This represents unexercisable grants of options under the 1991 Plan to
buy 4,000 shares granted on January 24, 2000 at 1,000 shares each on
January 24, 2002, January 24, 2003, January 24, 2004 and January 24,
2005, respectively at an exercise price of $7.125 per share.
(7) This represents unexercisable grants of options under the 1991 Plan to
buy 3,000 shares granted on November 30, 1998 at 1,000 shares each on
November 30, 2001, November 30, 2002, and November 30, 2003,
respectively at an exercise price of 4.00 per share.
<PAGE>
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 2000 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
2000 and 1999, outside directors also received a fee of $500 for each meeting of
a committee of the Board of Directors they attended.
At the 2000 Annual Meeting of the Board of Directors on February 7, 2000,
the Company granted 1,000 immediately exercisable stock options to each of the
seven directors, with a term of five years from the date of grant at an exercise
price of $5.10, 85% of fair market value. In addition, a total of 3,500 shares
of TCC common stock were granted to the seven directors at a price per share of
$6.00, which was equal to fair market value on February 7, 2000. The directors
also elected to receive Company stock in lieu of cash for their director's fees
on November 18, 1999 and August 3, 2000. They were granted 585 shares each on
November 18, 1999 at the fair market price on that day of $3.25 and 633 shares
each on August 3, 2000 at the fair market price on that day of $3.00.
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 the seven directors at a price per share of $4.00,
which was equal to fair market value on February 8, 1999.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
-----------------------------------------------
The following table shows, as of December 15, 2000, 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.
Beneficial Ownership Percent of
Name and Address (Number of Shares) (1) Class (1)
---------------- ---------------------- ---------
Royce & Associates, Inc. 106,700 (2) 8.2% (2)
c/o Charles M. Royce
1414 Avenue of the Americas
New York, NY 10019
(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 Royce & Associates, Inc. (Royce) as set forth
herein is based upon their Schedule 13G filed February 1, 2000 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.
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 15, 2000:
<PAGE>
<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, 49 45,341 (3) 3.0%
1998 - Class I Director Chairman of the Board
Mitchell B. Briskin (4) Director 41 4,635 (5) *
1998 - Class I Director
David A. B. Brown (6) Director 57 5,718 (7) *
1998 - Class II Director
Robert T. Lessard (8) Director 60 6,136 (9) *
1997 - Class II Director
Carl H. Guild, Jr. (10) Director, 56 163,886 (11) 11.0%
1997 - Class III Director Vice Chairman of the
Board, Chief Executive
Officer and President
Donald Lake (12) Director 56 4,635 (13) *
1998 - Class III Director
Thomas E. Peoples (14) Director 52 5,185 (15) *
1998 - Class III Director
Non-Director Officers:
John I. Gill (16) Executive Vice President 61 23,051 (17) 1.5%
Michael P. Malone (18) Chief Financial Officer, 41 7,002 (19) *
Treasurer and Asst. Clerk
All directors, director nominees 265,589 (20) 17.8%
and officers as a group (9 persons)
</TABLE>
*represents less than one (1) percent of the outstanding common stock
(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 15, 2000, 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 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.
<PAGE>
(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 37,278 shares owned by TechMan, which is wholly owned by Dr.
Awan, and 2,000 shares issuable upon the exercise of stock options.
(4) Mr. Briskin, is a Principal at Stonebridge Associates, an investment
bank, where he has worked 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 2,278 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 2,000 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 2,945 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.
(11) Includes an aggregate of 161,215 shares issuable upon the exercise of
various stock options that have vested.
(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.
<PAGE>
(13) Includes an aggregate of 2,278 shares issuable upon the exercise of
stock options.
(14) Since October 1, 1999, Mr. Peoples has been 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 2,278 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) Includes an aggregate of 3,500 shares issuable upon the exercise of a
stock option.
(18) Mr. Malone, Chief Financial Officer, 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.
(19) Includes an aggregate of 4,500 shares issuable upon the exercise of a
stock option.
(20) Includes an aggregate of 182,994 shares of common stock issuable upon
the exercise of vested stock options.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
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.
No director or executive officer is related to any other director or
executive officer by blood marriage.
<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
September 30, 2000 and October 2, 1999 F-1
Consolidated Statements of Operations for the Years Ended
September 30, 2000, October 2, 1999 and October 3,1998 F-2
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2000, October 2, 1999 and October 3,1998 F-3
Consolidated Statements of Comprehensive Income (Loss) and
Stockholders' Equity for the Years Ended September 30, 2000,
October 2, 1999 and October 3,1998 F-4
Notes to Consolidated Financial Statements F-5-F-14
Report of Independent Public Accountants F-15
Report of Independent Public Accountants F-16
[a] (2) The following Consolidated Financial Statement Schedule is included herein:
Schedule II - Valuation and Qualifying Accounts S-1
Reports 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
10.3 Loan and security agreement, dated July 31, 2000 between the Company
and Coast Business Credit, a division of Southern Pacific Bank
10.4 Amendment to Loan and security agreement, dated December 28, 2000
between the Company and Coast Business Credit, a division of Southern
Pacific Bank
21 List of Subsidiaries of the Company
23.1 Consent of Grant Thornton LLP
23.2 Consent of Arthur Andersen LLP
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
(b) Reports on Form 8-K
-------------------
During the third quarter of fiscal 2000 the registrant filed one (1)
Form 8-K on June 16, 2000, with respect to a change of auditors.
<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 28, 2000.
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 28, 2000
------------------
Carl H. Guild, Jr. Vice Chairman of the Board, Director
(Principal Executive Officer)
/s/ Michael P. Malone Treasurer and Chief Financial Officer December 28, 2000
---------------------
Michael P. Malone (Principal Financial
and Accounting Officer)
/s/ Dr. Mahmud Awan Chairman of the Board, Director December 28, 2000
-------------------
Dr. Mahmud Awan
/s/ Mitchell B. Briskin Director December 28, 2000
-----------------------
Mitchell B. Briskin
/s/ David A. B. Brown Director December 28, 2000
---------------------
David A. B. Brown
/s/ Donald Lake Director December 28, 2000
---------------
Donald Lake
/s/ Robert T. Lessard Director December 28, 2000
---------------------
Robert T. Lessard
/s/ Thomas E. Peoples Director December 28, 2000
---------------------
Thomas E. Peoples
</TABLE>
<PAGE>
F-1
Technical Communications Corporation
Consolidated Balance Sheets
September 30, 2000 and October 2, 1999
<TABLE>
<CAPTION>
ASSETS 2000 1999
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,121,617 $ 2,338,935
Accounts receivable - trade, less allowance
for doubtful accounts of $70,000 363,742 2,603,401
Inventories 3,452,403 3,035,937
Refundable income taxes - 276,960
Deferred income taxes 157,500 809,555
Other current assets 269,980 84,065
----------------------------------
Total current assets 7,365,242 9,148,853
----------------------------------
Equipment and leasehold improvements 4,899,615 4,640,222
Less accumulated depreciation (4,330,749) (3,960,614)
----------------------------------
Equipment and leasehold improvements, net 568,866 679,608
----------------------------------
Goodwill 1,614,131 1,614,131
Less accumulated amortization (1,146,262) (931,352)
----------------------------------
Goodwill, net 467,869 682,779
----------------------------------
Other assets 740 149,675
----------------------------------
$ 8,402,717 $10,660,915
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 524,231 $ 258,067
Accrued liabilities:
Compensation and related expenses 162,420 230,654
Other 435,602 870,936
----------------------------------
Total current liabilities 1,122,253 1,359,657
----------------------------------
Other long-term liabilities - 365,721
Commitments and contingencies
Stockholders' equity
Common stock - par value $.10 per share; 131,215 129,454
authorized 3,500,000 shares, issued 1,312,153
and 1,294,541 shares
Treasury stock at cost, 15,037 and 27,063 shares (118,610) (213,375)
Additional paid-in capital 1,294,579 1,305,870
Accumulated other comprehensive items - -
Retained earnings 5,973,280 7,713,588
----------------------------------
Total stockholders' equity 7,280,464 8,935,537
----------------------------------
$ 8,402,717 $10,660,915
==================================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
F-2
Technical Communications Corporation
Consolidated Statements of Operations
Years Ended September 30, 2000 and October 2, 1999 and October 3, 1998
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Net sales $ 5,574,108 $ 6,433,683 $13,855,781
Cost of sales 2,376,433 3,128,491 5,462,608
------------------------------------------------
Gross profit 3,197,675 3,305,192 8,393,173
------------------------------------------------
Operating expenses:
Selling, general and
administrative expenses 3,874,424 4,312,162 6,220,992
Product development costs 1,156,692 1,935,859 1,414,746
------------------------------------------------
Total operating expenses 5,031,116 6,248,021 7,635,738
------------------------------------------------
Operating profit (loss) (1,833,441) (2,942,829) 757,435
Other income (expense)
Gain on sale of investment - 1,151,172 -
Investment income 210,939 147,860 24,068
Interest expense (2,305) (4,641) (142,056)
Other 57,869 23,717 2,690
------------------------------------------------
Total other income (expense) 266,503 1,318,108 (115,298)
------------------------------------------------
Income (loss) before income taxes (1,566,938) (1,624,721) 642,137
Provision (benefit) for income taxes 173,376 (406,179) 160,534
------------------------------------------------
Net income (loss) $(1,740,314) $(1,218,542) $ 481,603
=========== =========== ===========
Net income (loss) per common share
Basic (1.35) (0.96) 0.38
Diluted (1.35) (0.96) 0.37
Weighted average common shares outstanding
Basic 1,289,523 1,264,626 1,281,924
Diluted 1,289,523 1,264,626 1,288,007
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
F-3
Technical Communications Corporation
Consolidated Statements of Cash Flows
Years Ended September 30, 2000 and October 2, 1999 and October 3, 1998
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Operating activities:
Net income (loss) ($1,740,314) ($1,218,542) 481,603
Adjustments to reconcile net income (loss)
to cash provided by (used for) operating activities:
Depreciation and amortization 733,980 896,965 873,642
Loss on disposal of fixed assets - 28,697 20,000
Non-cash compensation 47,602 14,675 18,263
Deferred income taxes 292,478 (167,341) 9,907
Gain on sale of investment - (1,151,168) -
Changes in current assets and current liabilities:
Accounts receivable 2,239,659 5,592,895 (4,936,747)
Unbilled revenue - - 198,038
Inventories (416,466) 83,354 304,688
Refundable income taxes 276,960 84,572 (68,903)
Other current assets (185,915) 4,418 29,464
Accounts payable and accrued liabilities (236,423) (1,586,926) 114,723
--------------------------------------------------
Cash provided by (used for) operating activities 1,011,561 2,581,599 (2,955,322)
--------------------------------------------------
Investing activities:
Additions to equipment and leasehold improvements (259,393) (166,581) (511,423)
Cancellation of life insurance policies - 5,437 152,787
Long term receivable - (9,824) 114,665
Proceeds from sale of investment - 1,401,968 -
Investment in capitalized software - - (275,101)
Other assets - - 1,500
--------------------------------------------------
Cash provided by (used for) investing activities (259,393) 1,231,000 (517,572)
--------------------------------------------------
Financing activities:
Exercise of stock options, including income tax benefits - - 88,689
Proceeds from stock issuance 37,633 40,803 -
Borrowings under line of credit - - 4,500,000
Payment of line of credit - (2,250,000) (2,250,000)
Payment of long-term debt (7,119) (4,516) (2,494)
--------------------------------------------------
Cash provided by (used for) financing activities 30,514 (2,213,713) 2,336,195
--------------------------------------------------
Net increase (decrease) in cash and cash equivalents 782,682 1,598,886 (1,136,699)
Cash and cash equivalents at beginning of year 2,338,935 740,049 1,876,748
--------------------------------------------------
Cash and cash equivalents at end of year $3,121,617 $2,338,935 $ 740,049
==================================================
Supplemental disclosures:
Interest paid $ 4,305 $ 7,123 $ 139,063
Income taxes paid (net of refunds received) (394,430) (36,366) 108,765
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
F-4
Technical Communications Corporation
Consolidated Statements of Comprehensive Income (Loss) and Stockholders' Equity
Years Ended September 30, 2000 and October 2, 1999 and October 3, 1998
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Comprehensive Income (Loss)
Net income (loss) $ (1,740,314) $ (1,218,542) $ 481,603
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) $ (1,740,314) $ (1,640,542) $ 903,603
==================================================
Stockholders' Equity
Shares of common stock:
Beginning balance 1,294,541 1,283,238 1,273,703
Exercise of stock options - - 9,535
Issuance of shares to ESPP participants 17,612 11,303 -
--------------------------------------------------
Ending balance 1,312,153 1,294,541 1,283,238
==================================================
Common stock at par value:
Beginning balance $ 129,454 $ 128,324 $ 127,370
Exercise of stock options - - 954
Issuance of shares to ESPP participants 1,761 1,130 -
--------------------------------------------------
Ending balance 131,215 129,454 128,324
--------------------------------------------------
Additional paid-in capital:
Beginning balance 1,305,870 1,266,197 1,526,110
Exercise of stock options - - 87,735
Issuance of shares to ESPP participants 35,872 39,673 -
Termination of ESOP - - (347,648)
--------------------------------------------------
Ending balance 1,341,742 1,305,870 1,266,197
--------------------------------------------------
ESOP deferred compensation:
Beginning balance - - (527,772)
Principal payments on ESOP debt - - -
Termination of ESOP - - 527,772
--------------------------------------------------
Ending balance - - -
--------------------------------------------------
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 7,713,588 8,945,941 8,464,338
Issuance of stock grants (47,163) (13,811) -
Net income (loss) (1,740,314) (1,218,542) 481,603
--------------------------------------------------
Ending balance 5,926,111 7,713,588 8,945,941
--------------------------------------------------
Treasury stock:
Beginning balance (213,375) (241,861) (80,000)
Termination of ESOP - - (180,124)
Issuance of stock grants 94,765 28,486 18,263
--------------------------------------------------
Ending balance (118,610) (213,375) (241,861)
--------------------------------------------------
Total stockholders' equity $ 7,280,458 $ 8,935,537 $10,520,601
==================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
F-5
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 worldwide.
(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.
Liquidity Matters
The Company's revenues have historically included significant
transactions with foreign governments and other organizations. The
Company expects this trend to continue. The timing of these transactions
has in the past and will in the future impact the cash flow of the
Company. Although the Company believes there are currently sufficient
cash and available funds under the line of credit to meet its working
capital needs, delays in the timing of significant transactions may cause
the Company to reevaluate and adjust its operations.
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
operations for the period. The cost of maintenance and repairs is charged
to operations 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 September 30, 2000, the
Company had fully amortized its investments in capitalized software
totaling $357,445.
<PAGE>
F-6
Notes to Consolidated Financial Statements (continued)
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 using 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.
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 with the fiscal year 2000 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 asset/liability method in
accounting for income taxes. Under the asset/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
historical 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.
<PAGE>
F-7
Notes to Consolidated Financial Statements (continued)
Earnings (Loss) per Share("EPS")
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share," the Company presents 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 2000 and 1999 ended on September 30, 2000
and October 2, 1999 and each included 52 weeks, while the year ended
October 3, 1998, included 53 weeks.
Comprehensive Income
During 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 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 December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
No. 101"), "Revenue Recognition in Financial Statements." SAB No. 101
provides guidance on applying generally accepted accounting principles to
revenue recognition, presentation and disclosure in financial statements.
Subsequently, the SEC has amended the implementation dates so that the
Company is required to adopt the provisions of SAB No. 101 in the fourth
quarter of 2001. We are currently reviewing the impact of SAB No. 101,
but we believe that it will not materially affect the Company's results
of operations or financial position.
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. In June 2000, SFAS
No. 133 was amended by Statement of Financial Accounting Standards No.
138 (SFAS 138), "Accounting for Derivative Instruments and Hedging
Activities - an amendment of FASB Statement No. 133. Management does not
expect the adoption of these statements to have a material impact on its
financial position or results of operations.
<PAGE>
F-8
Notes to Consolidated Financial Statements (continued)
(3) Earnings (Loss) Per Share
In accordance with SFAS No. 128, "Earnings Per Share", basic and diluted
EPS were calculated as follows:
<TABLE>
<CAPTION>
September 30, October 2, October 3,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Basic Net Income (Loss) $ (1,740,314) $ (1,218,542) $ 481,603
------------------------------------------------
Weighted Average Shares Outstanding 1,289,523 1,264,626 1,281,924
Outstanding dilutive stock options with option
price less than average market price - - 6,083
------------------------------------------------
Adjusted Weighted Average Shares 1,289,523 1,264,626 1,288,007
------------------------------------------------
Basic Earnings (Loss) Per Share $ (1.35) $ (0.96) $ 0.38
------------------------------------------------
Diluted Earnings (Loss) Per Share $ (1.35) $ (0.96) $ 0.37
------------------------------------------------
</TABLE>
Outstanding potentially dilutive stock options which were not included in
the above calculations for the respective fiscal years were as follows:
217,669 in 2000; 180,169 in 1999 and 138,316 in 1998.
(4) Treasury Stock Transactions
During fiscal years 2000, 1999 and 1998, 12,026, 3,500 and 2,865 shares,
respectively, of Technical Communications Corporation Common Stock were
granted to members of the Company's Board of Directors. The prices of
shares issued in 2000 ranged from $3.00 to $6.00 per share. The price of
shares issued in 1999 and 1998 were at a price per share of $4.00 and
$6.38, respectively. All grants were made at the current market value on
the date of grant and 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.
(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
1998 through 2000 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
(loss) and earnings (loss) per share would have been as follows:
<TABLE>
<CAPTION>
September 30, October 2, October 3,
2000 1999 1998
<S> <C> <C> <C>
Net income (loss)
As reported $(1,740,314) $(1,218,542) $ 481,603
Pro forma $(1,887,120) $(1,549,036) $ 296,646
Basic earnings (loss) per common share
As reported $ (1.35) $ (0.96) $ 0.38
Pro forma $ (1.46) $ (1.22) $ 0.26
</TABLE>
<PAGE>
F-9
Notes to Consolidated Financial Statements (continued)
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 6.31%, 4.86%, and 4.08%
for 2000, 1999, and 1998, respectively, expected life equal to 5 years,
expected volatility of 122%, 85% and 100% in 2000, 1999 and 1998,
respectively, and an expected dividend yield of 0%.
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
September 30. October 2, October 3,
2000 1999 1998
-------------------- ----------------------- -----------------------
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 year 256,074 $5.91 144,399 $7.79 261,155 $10.14
Options granted
Option Price = Fair Market Value 19,000 $6.53 114,000 $3.91 106,369 $6.58
Option Price * Fair Market Value - - -
Option Price ** Fair Market Value 8,000 $5.10 7,000 $3.40 -
Options exercised - - (3,100) $4.00
Options forfeited (28,000) $8.43 (9,325) $8.61 (220,025) $9.57
------- ------ --------
Options outstanding, end of year 255,074 $5.65 256,074 $5.91 144,399 $7.79
Options exercisable 209,149 $5.40 193,924 $5.45 69,029 $8.12
Weighted average fair value per share
of options granted during the year $5.44 $2.73 $4.65
</TABLE>
The following summarizes certain data for options outstanding at
September 30, 2000:
<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
year: $ 1.68- $ 5.00 142,000 $ 4.06 7.9
$ 5.01- $10.00 91,294 $ 6.56 7.0
$10.01- $15.00 20,160 $12.04 5.1
$15.01- $16.75 1,620 $15.80 2.4
-------
255,074 $ 5.66 7.3
Options exercisable: $ 1.68- $ 5.00 129,000 $ 4.11
$ 5.01- $10.00 66,069 $ 6.52
$10.01- $15.00 11,860 $11.81
$15.01- $16.75 1,620 $15.80
-------
209,149 $ 5.40
</TABLE>
(6) Inventories
<TABLE>
<CAPTION>
Inventories consist of the following: September 30, October 2,
2000 1999
<S> <C> <C>
Finished goods $ 622,003 $ 655,167
Work in process 1,181,510 216,072
Raw materials and supplies 1,648,891 2,164,698
--------------- ----------------
Total inventories $ 3,452,404 $ 3,035,937
--------------- ----------------
</TABLE>
<PAGE>
F-10
Notes to Consolidated Financial Statements (continued)
(7) Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
September 30, October 2, Estimated
2000 1999 Useful Life
<S> <C> <C> <C>
Engineering and manufacturing equipment $2,489,172 $2,330,876 3-8 years
Demonstration equipment 842,568 779,732 3 years
Furniture and fixtures 1,127,373 1,089,112 3-8 years
Automobiles 24,385 24,385 3 years
Remaining term
Leasehold improvements 416,117 416,117 of lease
-------------------------------------------
Total equipment and
leasehold improvements $4,899,615 $4,640,222 3-8 years
-------------------------------------------
</TABLE>
(8) Other Accrued Liabilities
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
September 30, October 2,
2000 1999
<S> <C> <C>
Reserve for product warranty $ 92,996 $ 240,462
Professional service fees 95,008 176,803
Sales representative commissions 38,595 131,075
Customer support agreements 44,000 147,700
Income taxes payable - 3,735
Other 165,003 171,161
----------------------------------
Total other accrued liabilities $ 435,602 $ 870,936
----------------------------------
</TABLE>
(9) Debt
In August 2000, the Company successfully negotiated a new $5 million
asset-based credit facility with Coast Business Credit ("Coast"). The
line carries an interest rate of prime plus 1/2% (10.0% at September 30,
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. At
September 30, 2000 the Company was in default of the net worth covenant.
Subsequently, Coast waived the default and modified the agreement to
reduce the minimum net worth requirement for the future and added an
interest coverage ratio requirement. In addition, Coast has suspended the
Company's ability to request loans, of up to $500,000, against inventory
balances. The line matures in August 2003. The Company believes this new
credit facility, as amended 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 September 30, 2000, the Company has
outstanding standby letters of credit, which were supported by the line
of credit amounting to $20,879. Wainwright Bank has agreed to honor these
standby letters of credit until they mature on December 31, 2000.
(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 December 31, 2002. Future minimum lease payments
amount to $171,216 in fiscal 2001, $171,216 in fiscal 2002 and $42,804 in
fiscal 2003. 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 lease term, if elected. Annual rental expense amounted to
$161,492 in fiscal year 2000, $157,182 in fiscal year 1999 and $155,300
in fiscal year 1998.
<PAGE>
F-11
Notes to Consolidated Financial Statements (continued)
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 $19,542 at
September 30, 2000). 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 amount to $6,241 in 2001.
(11) Income Taxes
<TABLE>
<CAPTION>
The provision (benefit) for income taxes consists of the following:
September 30, October 2, October 3,
2000 1999 1998
<S> <C> <C> <C>
Current:
Federal $(117,470) $ (109,625) $ 29,629
State 3,235 (213,184) 26,706
------------------- ------------------ -------------------
Total current taxes (114,235) (322,809) 56,335
------------------- ------------------ -------------------
Deferred:
Federal 231,446 (46,142) 111,641
State 56,165 (37,228) (7,442)
------------------- ------------------ -------------------
Total deferred taxes 287,611 (83,370) 104,199
------------------- ------------------ -------------------
Total provision (benefit) $ 173,376 $ (406,179) $ 160,534
------------------- ------------------ -------------------
</TABLE>
The provisions for income taxes are different from those that would be
obtained by applying the statutory federal income tax rate to earnings
before income taxes due to the following:
<TABLE>
<CAPTION>
September 30, October 2, October 3,
2000 1999 1998
<S> <C> <C> <C>
Tax at U.S. statutory rate $ (532,759) $ (552,405) $ 220,210
Benefit of Foreign Sales Corp. - - (74,269)
State income taxes,
net of Federal benefit 39,204 (165,272) 12,714
Other (147,352) (665) 32,933
Prior year under accrual (156,765) - -
Transfer of long-term
liability to deferred tax
asset (359,229) - -
Increase (reduction) in
valuation allowance 1,330,277 312,163 (31,054)
------------------ ------------------- -------------------
Total provision (benefit) $ 173,376 $ (406,179) $ 160,534
------------------ ------------------- -------------------
</TABLE>
Deferred income taxes consist of the following:
<TABLE>
<CAPTION>
September 30, October 2,
2000 1999
<S> <C> <C>
NOL Carryforward $ 1,532,480 $ 639,884
Goodwill 73,211 35,890
Inventory reserve 422,716 588,479
Warranty reserve 29,218 96,834
Payroll related accruals 25,875 42,529
Tax credits 181,232 179,489
Other 129,074 132,479
------------------- -------------------
Total 2,393,806 1,715,584
Less: valuation allowance (2,236,306) (906,029)
------------------- -------------------
Total $ 157,500 $ 809,555
------------------- -------------------
</TABLE>
<PAGE>
F-12
Notes to Consolidated Financial Statements (continued)
The valuation allowance relates to uncertainty with respect to the
Company's ability to realize its deferred tax assets.
Refundable income taxes represent estimated refunds from the Federal
government from carryback claims. All refunds from 1999 were received in
fiscal 2000. Additionally the Company received a refund in fiscal 2000
related to prior years which is recorded as a current benefit.
As of September 30, 2000 the Company has available tax loss carryforwards
for federal income tax purposes of $3,000,000, which expire in 2019. The
Company also has available tax loss carryfowards for state income tax
purposes of $5,100,000, which expire in 2004.
(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 2000, 1999 or 1998.
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 $36,091, $39,094 and
$37,700 in 2000, 1999 and 1998, respectively.
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 2000, 1999 or 1998.
On November 17, 1989, the Company established the Technical
Communications Corporation Employees' Stock Ownership Trust (the "Trust")
for the benefit of its employees. 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.
(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 September 30, 2000 and October 2, 1999, the Company was contingently
liable under open standby letters of credit totaling $20,879 and $67,476,
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 September 30, 2000, 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
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, all of which has been paid as
of September 30, 2000, (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.
<PAGE>
F-13
Notes to Consolidated Financial Statements (continued)
(15) Major Customers and Export Sales
In fiscal 2000, the Company had two customers, representing 41% (21% and
20%) of net 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.
A breakdown of net sales is as follows:
<TABLE>
<CAPTION>
September 30, October 2, October 3,
2000 1999 1998
<S> <C> <C> <C>
Domestic $ 2,446,083 $1,239,275 $ 1,631,459
Foreign 3,128,025 5,194,408 12,224,322
------------ -------------- --------------
Total Sales $5,574,108 $6,433,683 $13,855,781
-----------------------------------------------------------------------------------------------------
</TABLE>
A summary of foreign sales by geographic area follows:
<TABLE>
<CAPTION>
September 30, October 2, October 3,
2000 1999 1998
<S> <C> <C> <C>
North America
(excluding the U.S.) 3.9% 1.0% 0.1%
Central and South America 8.3% 1.0% 5.0%
Europe 22.0% 14.2% 4.2%
Mid-East and Africa 55.1% 82.6% 84.4%
Far East 10.7% 1.2% 6.3%
</TABLE>
(16) Legal Matters
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 fiscal year 2000 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.
(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.
<PAGE>
F-14
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________
Selected Quarterly Financial Data (Unaudited)
For the years ended September 30, 2000 and October 2, 1999:
First Quarter Second Quarter Third Quarter Fourth Quarter
Fiscal 2000 January 1, 2000 April 1, 2000 July 1, 2000 September 30, 2000
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 2,253,403 $ 1,381,050 $ 744,010 $ 1,195,645
Gross profit 1,443,068 678,906 310,449 765,252
Net (loss) income 106,687 (418,109) (703,517) (725,375)
Net (loss) income per share
Basic $ .08 $ (.32) $ (.54) $ (.57)
Diluted $ .08 $ (.32) $ (.54) $ (.57)
<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
-------------------------------------------------------------------------------------------------------------------
</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.
<PAGE>
F-15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Technical Communications
Corporation:
We have audited the accompanying consolidated balance sheet of Technical
Communications Corporation and subsidiaries as of September 30, 2000, and the
related consolidated statements of operations, cash flows, and comprehensive
income (loss) and stockholders' equity for the year then ended. 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 audit. The consolidated balance sheet of Technical Communications
Corporation and subsidiaries, as of October 2, 1999, and the related
consolidated statements of operations, cash flows, and comprehensive income
(loss) and stockholders' equity as of and for the years ended October 2, 1999
and October 3, 1998, were audited by other auditors whose report dated November
5, 1999, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
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 audit provides a reasonable basis for our
opinion.
In our opinion, the 2000 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Technical Communications Corporation and subsidiaries, as of September 30, 2000,
and the consolidated results of their operations and their consolidated cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States.
/s/ Grant Thornton LLP
Boston, Massachusetts
November 7, 2000
<PAGE>
F-16
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 the related consolidated statements of operations, cash
flows, and comprehensive income (loss) and stockholders' equity for the years
ended October 2, 1999 and October 3, 1998. 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 the
results of their operations and their cash flows for the years ended October 2,
1999 and October 3, 1998, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
November 5, 1999
<PAGE>
S-1
Technical Communications Corporation Schedule II
<TABLE>
<CAPTION>
Valuation and Qualifying Accounts
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 September 30, 2000 $ 70,000 -- -- $ 70,000
Year Ended October 2, 1999 70,000 -- -- 70,000
Year Ended October 3, 1998 25,000 $ 187,075 $ 142,075 70,000
</TABLE>
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE TO THE
CONSOLIDATED FINANCIAL STATEMENTS
To the Shareholders and Board of Directors of Technical Communications
Corporation:
Board of Directors
Technical Communications Corporation
In connection with our audit of the consolidated financial statements of
Technical Communications Corporation referred to in our report dated November 7,
2000, which is included in the annual report to security holders and
incorporated by reference in Part II of this form, we have also audited Schedule
II as it relates to the year ended September 30, 2000. In our opinion, this
schedule presents fairly, in all material respects, the 2000 information
required to be set forth therein.
/s/ Grant Thornton LLP
Boston, Massachusetts
November 7, 2000
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 as of and for the
years ended October 2, 1999 and October 3, 1998, 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 as of and for the years ended October 2, 1999 and October 3, 1998,
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
as of and for the years ended October 2, 1999 and October 3, 1998, 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
