<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
-----
Exchange Act of 1934 for the quarterly period ended January 1, 2000 or
Transition report pursuant to Section 13 or 15(d) of the Securities
-----
Exchange Act of 1934 for the transition period___________to__________
Commission File Number: 0-8588
TECHNICAL COMMUNICATIONS CORPORATION
------------------------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2295040
- ------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 DOMINO DRIVE, CONCORD, MA 01742-2892
- ---------------------------------------- -----------------------------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (978) 287-5100
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Number of shares of Common
Stock, $.10 par value, outstanding as of February 4, 2000: 1,312,513.
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<TABLE>
<CAPTION>
INDEX
Page
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<S> <C> <C>
PART I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets,
as of January 1, 2000 (unaudited) and October 2, 1999 1
Condensed Consolidated Statements of Operations,
Three (3) months ended January 1, 2000 and January 2, 1999 (unaudited), 2
Condensed Consolidated Statements of Cash Flows,
Three (3) months ended January 1, 2000 and January 2, 1999 (unaudited) 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 5
PART II Other Information 7
Signatures 8
</TABLE>
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PART I. Financial Information - Item 1. Financial Statements
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 1, 2000 October 2, 1999
--------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,432,119 $ 2,338,935
Accounts receivable - trade, less allowance for doubtful
accounts of $70,000 1,914,348 2,603,401
Inventories 2,866,163 3,035,937
Deferred income taxes 809,555 809,555
Other current assets 373,804 361,025
--------- ---------
Total current assets 9,395,989 9,148,853
Equipment and leasehold improvements 4,676,785 4,640,222
Less: accumulated depreciation and amortization 4,071,906 3,960,614
--------- ---------
604,879 679,608
Goodwill 1,614,131 1,614,131
Less: accumulated amortization 985,080 931,352
--------- ---------
629,051 682,779
Other assets 104,995 149,675
--------- ---------
$ 10,734,914 $ 10,660,915
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 155,960 $ 258,067
Accrued liabilities
Compensation and related expenses 251,785 230,654
Other 869,775 870,936
--------- ---------
Total current liabilities 1,277,520 1,359,657
--------- ---------
Other long-term liabilities 364,222 365,721
Commitments and contingencies
Stockholders' Equity:
Common stock, par value $.10 per share;
authorized 3,500,000 shares; issued and
outstanding 1,312,153 and 1,294,541 shares 131,215 129,454
Treasury stock at cost, 22,968 and 27,063 shares (181,106) (213,375)
Additional paid-in capital 1,341,742 1,305,870
Retained earnings 7,801,321 7,713,588
--------- ---------
Total stockholders' equity 9,093,172 8,935,537
--------- ---------
$ 10,734,914 $ 10,660,915
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 1
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TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
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<CAPTION>
Quarters Ended
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January 1, 2000 January 2, 1999
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<S> <C> <C>
Net sales $ 2,253,403 $ 1,071,356
Cost of sales 810,335 381,550
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Gross profit 1,443,068 689,806
Operating expenses:
Selling, general and
administrative expenses 952,833 1,495,672
Product development costs 361,344 539,662
----------- -----------
Total operating expenses 1,314,177 2,035,334
----------- -----------
Operating income (loss) 128,891 (1,345,528)
----------- -----------
Other income (expense):
Interest income 22,650 34,666
Interest expense (142) (3,207)
Other 1,010 (3,781)
----------- -----------
Total other income (expense): 23,518 27,678
----------- -----------
Income (loss) before income taxes 152,409 (1,317,850)
Provision (benefit) for income taxes 45,722 (329,462)
----------- -----------
Net income (loss) $ 106,687 $ (988,388)
=========== ===========
Net income (loss) per common share:
Basic $ .08 $ (.79)
Diluted $ .08 $ (.79)
Weighted average common shares outstanding
used in computation:
Basic 1,278,599 1,257,528
Diluted 1,281,013 1,257,528
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 2
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TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended
January 1, 2000 January 2, 1999
--------------- ---------------
<S> <C> <C>
Operating Activities:
Net income (loss) $ 106,687 $ (988,388)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 209,700 240,520
Non-cash compensation 13,309 --
Changes in assets and liabilities:
Accounts receivable 689,053 7,402,887
Inventories 169,774 (545,476)
Refundable income taxes -- --
Other current assets (12,779) (51,931)
Accounts payable and other accrued liabilities (83,630) (1,183,849)
----------- -----------
Net cash provided by operating activities 1,092,114 4,873,763
----------- -----------
Investing Activities:
Additions to equipment and leasehold improvements (36,563) (38,223)
Other assets -- 2,483
----------- -----------
Net cash used by investing activities (36,563) (35,740)
----------- -----------
Financing Activities:
Proceeds from stock issuance 37,633 40,803
Payment of line of credit -- (2,250,000)
----------- -----------
Net cash provided (used) by financing activities 37,633 (2,209,197)
Net increase in cash and cash equivalents 1,093,184 2,628,826
Cash and cash equivalents at beginning of the period 2,338,935 740,049
----------- -----------
Cash and cash equivalents at the end of the period $ 3,432,119 $ 3,368,875
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 142 $ 19,541
Income taxes paid -- 139,891
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 3
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TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FORWARD-LOOKING STATEMENTS
NOTE: THE DISCUSSIONS IN THIS FORM 10-Q, INCLUDING ANY DISCUSSION OF OR
IMPACT, EXPRESSED OR IMPLIED, ON TECHNICAL COMMUNICATIONS CORPORATION'S (THE
COMPANY) ANTICIPATED OPERATING RESULTS AND FUTURE EARNINGS, INCLUDING
STATEMENTS ABOUT THE COMPANY'S ABILITY TO ACHIEVE GROWTH AND PROFITABILITY,
CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED. THE COMPANY'S OPERATING RESULTS MAY
DIFFER SIGNIFICANTLY FROM THE RESULTS INDICATED BY SUCH FORWARD-LOOKING
STATEMENTS. THE COMPANY'S OPERATING RESULTS MAY BE AFFECTED BY MANY FACTORS,
INCLUDING BUT NOT LIMITED TO FUTURE CHANGES IN EXPORT LAWS OR REGULATIONS,
CHANGES IN TECHNOLOGY, THE EFFECT OF FOREIGN POLITICAL UNREST, THE ABILITY TO
HIRE, RETAIN AND MOTIVATE TECHNICAL, MANAGEMENT AND SALES PERSONNEL, THE
RISKS ASSOCIATED WITH THE TECHNICAL FEASIBILITY AND MARKET ACCEPTANCE OF NEW
PRODUCTS, CHANGES IN TELECOMMUNICATIONS PROTOCOLS, THE EFFECTS OF CHANGING
COSTS, EXCHANGE RATES AND INTEREST RATES AND THE COMPANY'S ABILITY TO
RENEGOTIATE ITS LINE OF CREDIT WITH ITS BANKS. THESE AND OTHER RISKS ARE
DETAILED FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION, INCLUDING THE FORM 10-K FOR THE FISCAL YEAR ENDED
OCTOBER 2, 1999 AND THIS FORM 10-Q FOR THE QUARTER ENDED JANUARY 1, 2000.
STATEMENT OF FAIR PRESENTATION
INTERIM FINANCIAL STATEMENTS. The accompanying unaudited condensed consolidated
financial statements include all adjustments (consisting only of normal
recurring accruals) which are, in the opinion of management, necessary for fair
presentation of the results of operations for the periods presented. Interim
results are not necessarily indicative of the results to be expected for a full
year.
Certain disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted as allowed by Form 10-Q. The accompanying unaudited consolidated
financial statements should be read in conjunction with the Company's
consolidated financial statements for the year ending October 2, 1999 as filed
with the Securities and Exchange Commission on Form 10-K.
NOTE 1. INVENTORIES
Inventories consisted of the following:
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<CAPTION>
January 1, 2000 October 2, 1999
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<S> <C> <C>
Finished Goods $ 256,265 655,167
Work in Process 299,412 216,072
Raw Materials 2,310,486 2,164,698
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$ 2,866,163 $ 3,035,937
========= ==========
</TABLE>
NOTE 2. LONG-TERM DEBT
At January 1, 2000, the Company has a $5,000,000 revolving line of credit at
an interest rate of the banks base rate plus 1/2 of 1% (9.75% at January 1,
2000) with Wainwright Bank and Trust Company. This line of credit is secured
by a pledge of substantially all the assets of the Company, requires no
compensating balances, and matures on May 1, 2000. Under the terms of the
line of credit agreement, the Company is required to comply with certain loan
covenants. As of January 1, 2000, the Company is in compliance with these
covenants. The amount of borrowings is restricted to a percentage of certain
accounts receivable and inventory balances. Availability under the line of
credit has been reduced by $67,476, as of January 1, 2000, as a result of
standby letters of credit. No other borrowings are outstanding against the
line.
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NOTE 3. COMMITMENTS AND CONTINGENCIES
The Company is the defendant in GERARD v. TECHNICAL COMMUNICATIONS CORPORATION,
ET AL., filed in the Superior Court of the Commonwealth of Massachusetts in
1999. This case arises from disputes concerning the hiring and termination of
Roland Gerard, former president of the Company. The Complaint alleges state law
claims for breach of contract, wrongful termination, and civil conspiracy.
Because of the early stage of the litigation, it is impossible to determine the
ultimate outcome. The Company is determined to contest this suit vigorously. An
earlier complaint brought by Mr. Gerard in the Federal court, which included the
state claims, and a federal securities claim was dismissed in July 1999; the
securities claims were dismissed with prejudice.
PART I, Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
The Company is in the business of designing, manufacturing and marketing
communications security equipment. The Company receives orders for equipment
from customers, which may take several months or longer to manufacture and ship.
With the exception of long-term contracts where revenue is recognized under the
percentage of completion method, the Company generally recognizes income on a
unit-of-delivery basis. This latter method can cause revenues to vary widely
from quarter to quarter and therefore quarterly comparisons of revenue may not
be indicative of any trend.
Net sales for the quarter ended January 1, 2000 and January 2, 1999, were
$2,253,403 and $1,071,356, respectively. This increase of 110% is attributed to
variability in revenue recognition as a result of the timing of shipments and
the receipt of anticipated orders. The strengthening of economic conditions in
many countries contributed to an increased order flow from our traditional
international government markets.
Gross profit for the first quarter of fiscal 2000 was $1,443,068 as compared to
gross profit of $689,806 for the same period of fiscal year 1999. This
represented a 109% increase in gross profit for the quarter. Gross profit
expressed as a percentage of sales remained constant at 64% in 2000 as compared
to the same period in fiscal year 1999.
Selling, general and administrative expenses for the first quarter of fiscal
2000 and 1999 were $952,833 and $1,495,672, respectively. This decrease of 36%
was primarily attributable to approximately $475,000 in costs associated with
the settlement of litigation, which occurred in the first quarter of 1999.
Product development costs for the quarter ended January 1, 2000 were $361,344
compared to $539,662 for the same period in fiscal 1999. This decrease of 33%
was attributable to a shift in development work to billable product
development from internal product development.
The Company showed net income of $106,687 for the first quarter of fiscal 2000
as compared to a net loss of $988,388 for the same period in fiscal 1999. The
increase in profitability is primarily attributable to the increase in gross
profit and the decrease in operating spending as described above.
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YEAR 2000 UPDATE
Technical Communications Corporation has been actively addressing the Year 2000
(Y2K) problem since April 1998. Generally speaking, the Y2K problem results from
the use of two-digit, rather than four-digit, date years in computer systems and
software applications.
The Company divided its Y2K efforts into three major areas: (i) products and
customers, (ii) enterprise business systems and information technology and (iii)
external systems and suppliers. The review of each area consisted of an
inventory of potentially affected systems, an assessment of Y2K readiness and
corrective action deployment. As of the date of this report, the Company has
completed these year 2000 initiatives.
As a result of completing these initiatives, the Company believes that all of
its material information technology systems and critical non-information
technology systems are year 2000 compliant. The Company believes that all of the
material products that it currently manufactures and sells are year 2000
compliant and not date sensitive. In addition, the Company is not aware of any
significant vendor that has experienced material disruption due to year 2000
issues. As of the date of this report, the Company has incurred expenses related
to the year 2000 problem, since April 1998, of approximately $63,000. The main
portion of these costs relates to the evaluation and testing of products for Y2K
compliance. We will continue to monitor our systems and vendors to ensure that
issues do not arise in the coming months. Although we do not anticipate any
future significant business interruption, we can give no assurance that such
interruption will not occur.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. In
June 1999, FASB issued Statement of Financial Accounting Standards No. 137 (SFAS
137), "Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement No. 133--an amendment of FASB Statement No.
133". This Statement has delayed the effective date of SFAS 133 until fiscal
years beginning after June 15, 2000. Management does not expect the adoption of
this statement to have a material impact on its financial position or results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments increased by $1,093,184 or 47% to $3,432,119 as
of January 1, 2000, from a balance of $2,338,935 at October 2, 1999. This
increase was primarily due to the reduction of accounts receivable and
inventory. The current ratio increased to 7.4:1 at January 1, 2000 compared to
6.7:1 as of October 2, 1999, primarily as a result of the cash received on
accounts receivable during the quarter.
At January 1, 2000, the Company has a $5,000,000 revolving line of credit at
an interest rate of prime plus 1/2 of 1% (8.75% at January 1, 2000) with
Wainwright Bank and Trust Company. This line of credit is secured by a pledge
of substantially all the assets of the Company, requires no compensating
balances, and matures on May 1, 2000. Under the terms of the line of credit
agreement, the Company is required to comply with certain loan covenants. As
of January 1, 2000, the Company is in compliance with these covenants. The
amount of borrowings is restricted to a percentage of certain accounts
receivable and inventory balances. Availability under the line of credit has
been reduced by $67,476, as of January 1, 2000, as a result of standby
letters of credit. No other borrowings are outstanding against the line.
Page 6
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Management anticipates no unusual capital expenditures during the remainder of
fiscal 2000. Management is currently working to renew its existing line of
credit, if it is unable to do so, its operations may be substantially adversely
affected.
Page 7
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PART II. Other Information
ITEM 1. LEGAL PROCEEDINGS:
The Company is the defendant in GERARD v. TECHNICAL COMMUNICATIONS CORPORATION,
ET AL., filed in the Superior Court of the Commonwealth of Massachusetts in
1999. This case arises from disputes concerning the hiring and termination of
Roland Gerard, former president of the Company. The Complaint alleges state law
claims for breach of contract, wrongful termination, and civil conspiracy.
Because of the early stage of the litigation, it is impossible to determine the
ultimate outcome. The Company is determined to contest this suit vigorously. An
earlier complaint brought by Mr. Gerard in the Federal court, which included the
state claims, and a federal securities claim was dismissed in July 1999; the
securities claims were dismissed with prejudice.
Item 2. Changes in Securities and Use of Proceeds:
Not applicable.
Item 3. Defaults Upon Senior Securities:
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders:
None.
Item 5. Other Information:
None.
Item 6. Exhibits and Reports on Form 8-K:
a. Exhibits:
Exhibit 27: Financial Data Schedule
b. Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHNICAL COMMUNICATIONS CORPORATION
------------------------------------
(Registrant)
February 11, 2000 By: /s/ Carl H. Guild, Jr.
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Date Carl H. Guild, Jr., President
and Chief Executive Officer
February 11, 2000 By: /s/ Michael P. Malone
- ----------------- ------------------------------
Date Michael P. Malone, Chief
Financial Officer
Page 9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-03-1999
<PERIOD-END> JAN-01-2000
<CASH> 3,432,119
<SECURITIES> 0
<RECEIVABLES> 1,984,348
<ALLOWANCES> 70,000
<INVENTORY> 2,866,163
<CURRENT-ASSETS> 9,395,989
<PP&E> 4,676,785
<DEPRECIATION> 4,071,906
<TOTAL-ASSETS> 10,734,914
<CURRENT-LIABILITIES> 1,277,520
<BONDS> 0
0
0
<COMMON> 131,215
<OTHER-SE> 8,961,957
<TOTAL-LIABILITY-AND-EQUITY> 10,734,914
<SALES> 2,253,403
<TOTAL-REVENUES> 2,253,403
<CGS> 810,335
<TOTAL-COSTS> 1,314,177
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 142
<INCOME-PRETAX> 152,409
<INCOME-TAX> 45,722
<INCOME-CONTINUING> 106,687
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 106,687
<EPS-BASIC> .08
<EPS-DILUTED> .08
</TABLE>
