EXHIBIT 13
Consolidated Balance Sheets:
September 28, 1996, and September 30, 1995.
1996 1995
____________ ____________
Assets
Current Assets:
Cash and cash equivalents $ 6,381,026 $ 3,877,790
Accounts receivable - trade, less
allowance for doubtful accounts
of $53,707 in 1996 and $48,692
in 1995 3,219,124 5,011,966
Inventories (Note 4) 2,615,772 2,427,828
Refundable income taxes (Note 6) - 139,944
Other current assets 199,122 342,756
_________________________________________________________________________
Total current assets 12,415,044 11,800,284
_________________________________________________________________________
Equipment and leasehold improvements
(Note 16) 4,223,816 3,626,364
Less accumulated depreciation and
amortization 2,646,683 1,984,631
_________________________________________________________________________
Equipment and leasehold
improvements-net 1,577,133 1,641,733
_________________________________________________________________________
Goodwill 1,614,131 1,569,620
Less accumulated amortization 286,623 65,770
_________________________________________________________________________
Goodwill - net 1,327,508 1,503,850
_________________________________________________________________________
Deferred income taxes (Note 6) 221,640 -
Other assets 458,708 402,568
_________________________________________________________________________
$ 16,000,033 $ 15,348,435
_________________________________________________________________________
_________________________________________________________________________
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 504,860 $ 450,650
Long-term debt - current portion (Note 5) 1,145,175 696,136
Accrued liabilities:
Compensation and related expenses 597,938 429,146
Other (Note 3) 2,019,303 1,553,140
_________________________________________________________________________
Total current liabilities 4,267,276 3,129,072
_________________________________________________________________________
Long-term debt (Note 5) 1,200,000 2,345,175
Other long-term liabilities - 205,437
Commitments and contingencies (Notes 10,
12, 14 and 16)
Stockholders' Equity
Common stock - par value $.10 per share;
authorized 3,500,000 shares, issued
1,264,496 shares in 1996 and 1,254,426
in 1995 126,450 125,443
Treasury Stock at cost, 10,000 shares (80,000) (80,000)
Additional paid-in capital 1,473,643 1,388,927
ESOP deferred compensation (Note 5) (695,175) (941,311)
Retained earnings 9,707,839 9,175,692
_________________________________________________________________________
Total stockholders' equity 10,532,757 9,668,751
_________________________________________________________________________
$16,000,033 $15,348,435
_________________________________________________________________________
_________________________________________________________________________
The accompanying notes are an integral part of these consolidated financial
statements.
Page AR-6
Consolidated Statements of Income:
Years Ended September 28, 1996, September 30, 1995, and October 1, 1994.
1996 1995 1994
___________ ___________ __________
Net sales $14,012,802 $10,227,565 $9,065,715
Cost of sales 5,781,414 4,875,683 3,770,890
_________________________________________________________________________
Gross profit 8,231,388 5,351,882 5,294,825
_________________________________________________________________________
Operating expenses:
Selling, general and
administrative expenses 5,582,553 3,826,778 4,045,176
Product development costs 1,955,852 1,492,370 1,221,713
_________________________________________________________________________
Total operating expenses 7,538,405 5,319,148 5,266,889
_________________________________________________________________________
Operating profit 692,983 32,734 27,936
Other income (expense):
Investment income 239,142 271,815 212,211
Interest expense (243,472) (158,570) (114,115)
Other 20,876 (27,652) 18,111
_________________________________________________________________________
Total other income 16,546 85,593 116,207
_________________________________________________________________________
Income before income taxes 709,529 118,327 144,143
Provision for income taxes
(Note 6) 177,382 29,582 28,097
Net income $ 532,147 $ 88,745 $ 116,046
_________________________________________________________________________
_________________________________________________________________________
Net income per common share
(Note 2) $ 0.42 $ 0.07 $ 0.09
Weighted average common shares
outstanding 1,257,384 1,252,567 1,245,410
The accompanying notes are an integral part of these consolidated financial
statements.
Page AR-7
Consolidated Statements of Cash Flows:
Years Ended September 28, 1996, September 30, 1995, and October 1, 1994.
1996 1995 1994
_____________ _____________ ___________
Operating Activities:
Net Income $ 532,147 $ 88,745 $ 116,046
Adjustments to reconcile
net income to net cash provided
(used) by operating activities:
Depreciation and amortization 882,905 500,850 291,990
Non-cash compensation
associated with ESOP 246,136 246,136 259,705
Changes in assets and liabilities,
net of the acquisition of Datotek:
Decrease (increase) in accounts
receivable 1,792,842 (992,005) 411,089
Decrease (increase) in inventories (187,944) 136,602 132,032
Decrease (increase) in refundable
income taxes 139,944 (55,604) 61,625
Decrease (increase) in other
current assets 143,634 (253,904) (28,886)
Decrease (increase) in other assets
and deferred income taxes (277,780) (256,216) (11)
Increase (decrease) in accounts payable
and other accrued liabilities 483,728 187,235 (110,156)
___________________________________________________________________________________________
Net cash provided (used) by operating
activities 3,755,612 (398,161) 1,133,434
___________________________________________________________________________________________
Investing Activities:
Additions to equipment and
leasehold improvements (597,452) (366,300) (185,284)
Cash paid for Datotek acquisition (44,511) (3,687,000) 0
___________________________________________________________________________________________
Net cash provided (used) by investing
activities (641,963) (4,053,300) (185,284)
___________________________________________________________________________________________
Financing Activities:
Proceeds from exercise of stock
options 85,723 14,500 63,600
Proceeds from bank loan - 2,250,000 -
Payment of debt (696,136) (396,136) (259,705)
___________________________________________________________________________________________
Net cash provided (used) by financing
activities (610,413) 1,868,364 (196,105)
___________________________________________________________________________________________
Net increase (decrease) in cash and
cash equivalents 2,503,236 (2,583,097) 752,045
Cash and cash equivalents at beginning
of year 3,877,790 6,460,887 5,708,842
___________________________________________________________________________________________
Cash and cash equivalents at end of year $ 6,381,026 $ 3,877,790 $ 6,460,887
___________________________________________________________________________________________
___________________________________________________________________________________________
Supplemental disclosures:
Interest paid $ 243,472 $ 158,570 $ 114,115
Income taxes paid
(net of refunds received) 103,497 (24,401) (36,626)
The accompanying notes are an integral part of these consolidated financial
statements.
Page AR-8
Consolidated Statements of Stockholders' Equity:
Years Ended September 28, 1996, September 30, 1995, and October 1, 1994
1996 1995 1994
____________ ____________ ____________
Shares of Common Stock:
Beginning balance 1,254,426 1,251,176 1,238,276
Exercise of stock options 10,070 3,250 12,900
_____________________________________________________________________________
Ending balance 1,264,496 1,254,426 1,251,176
_____________________________________________________________________________
_____________________________________________________________________________
Common Stock at par value:
Beginning balance $ 125,443 $ 125,118 $ 123,828
Exercise of stock options 1,007 325 1,290
_____________________________________________________________________________
Ending balance 126,450 125,443 125,118
_____________________________________________________________________________
Treasury Stock:
Beginning balance (10,000 shares) (80,000) (80,000) (80,000)
Purchase of treasury stock - - -
_____________________________________________________________________________
Ending balance (80,000) (80,000) (80,000)
_____________________________________________________________________________
Additional Paid-In Capital
Beginning balance 1,388,927 1,374,752 1,312,442
Exercise of stock options 84,716 14,175 62,310
_____________________________________________________________________________
Ending balance 1,473,643 1,388,927 1,374,752
_____________________________________________________________________________
ESOP Deferred Compensation:
Beginning balance (941,311) (1,187,447) (1,447,152)
Principal payments on ESOP debt
(Note 5) 246,136 246,136 259,705
_____________________________________________________________________________
Ending balance (695,175) (941,311) (1,187,447)
_____________________________________________________________________________
Retained Earnings:
Beginning balance 9,175,692 9,086,947 8,970,901
Net income 532,147 88,745 116,046
_____________________________________________________________________________
Ending balance 9,707,839 9,175,692 9,086,947
_____________________________________________________________________________
Total stockholders' equity $10,532,757 $ 9,668,751 $ 9,319,370
_____________________________________________________________________________
_____________________________________________________________________________
The accompanying notes are an integral part of these consolidated financial
statements.
Page AR-9
Notes to Consolidated Financial Statements
(1) Company Operations
Technical Communications Corporation and its wholly-owned subsidiaries
(the Company) operate in one industry segment: the design, development,
manufacture, distribution and sale of communications security devices
and systems.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, TCC Foreign Sales
Corporation, a qualified Foreign Sales Corporation (FSC), and TCC
Investment Corporation, a Massachusetts Security Corporation. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits at banks, and
certificates of deposit and other investments (including mutual
funds) readily convertible into cash. Cash equivalents are stated at
cost, which approximates market value.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation
and amortization are computed using the straight-line method over the
estimated useful life of the asset. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts, and any resulting gain or loss is
recognized in income for the period. The cost of maintenance and
repairs is charged to income as incurred; significant renewals and
betterments are capitalized.
Recognition of Revenue
The Company generally recognizes revenue upon shipment. Income on
long-term contracts is recognized on the unit-of-delivery basis.
Unbilled costs on unit-of-delivery contracts are included in
inventory. There were no material accounts receivable related to
long-term contracts at September 28, 1996, or September 30, 1995.
Income Taxes
The Company adopted Statement of Financial Accounting Standard No.
109 "Accounting for Income Taxes" (SFAS 109) in fiscal year 1994.
SFAS 109 requires the use of the liability method in accounting for
income taxes. Under the liability method, deferred income taxes are
recognized at current income tax rates to reflect the tax effect of
temporary differences between the consolidated financial reporting
and tax bases of assets and liabilities.
Page AR-10
Notes to Consolidated Financial Statements (continued)
Warranty Costs and Field Installation Costs
The Company provides for warranty costs based on a percentage of
sales. The percentage is adjusted periodically in accordance with
actual experience. As of September 28, 1996, the Company accrued an
additional $192,000 of warranty costs related to specific product
warranty obligations. Field installation costs, which are accrued
upon sale of product when appropriate, represent the Company's
obligation to provide installation of equipment already sold.
Earnings per Share
Earnings per common share are based on the weighted average number of
shares outstanding during the year using the treasury stock method.
The effect of assumed conversion of dilutive stock options is not
material.
Reclassification of Prior Year Amounts
Certain prior year financial statement information has been
reclassified to be consistent with the current year presentation.
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. Fiscal years 1996, 1995 and 1994 ended on
September 28, 1996, September 30, 1995 and October 1, 1994,
respectively.
(3) Other Accrued Liabilities
Other accrued liabilities consist of the following:
September 28, September 30,
1996 1995
_____________ _____________
Reserve for product warranty $ 386,175 $ 533,126
Reserve for product installation 141,650 162,000
Customer advance payments 108,402 121,554
Sales representative commissions 340,928 64,588
Customer support agreements 344,520 434,000
Income taxes payable 463,227 99,461
Other 234,401 138,411
________________________________________________________________________
Total $ 2,019,303 $ 1,553,140
________________________________________________________________________
________________________________________________________________________
(4) Inventories
Inventories consist of the following:
September 28, September 30,
1996 1995
_____________ _____________
Finished goods $ 10,557 $ 374,047
Work in process on long-term contracts - 25,056
Other work in process 853,422 642,332
Raw materials and supplies 1,751,793 1,386,393
________________________________________________________________________
Total inventories $ 2,615,772 $ 2,427,828
________________________________________________________________________
________________________________________________________________________
Page AR-11
Notes to Consolidated Financial Statements (continued)
(5) Debt
On November 17, 1989, the Company established the Technical
Communications Corporation Employees' Stock Ownership Trust (the Trust)
for the benefit of its employees. During 1990 and 1991, the Trust
borrowed $1,212,500 and $1,287,488, respectively, from two banks, and
purchased 190,350 shares of the Company's common stock at fair market
value. The Company is acting as guarantor on the outstanding loans and,
as a result, has recorded the principal balance of such loans on its
balance sheet as long-term debt with an offsetting charge to "ESOP
deferred compensation" within the Stockholders' Equity section.
The 1990 loan to the Trust bears interest on the principal amount
outstanding at a rate equal to 8.75%. It requires a balloon payment of
approximately $82,000 in April 1997. The 1991 loan was renewed in August
1994 for a further three-year term, and now bears interest at a rate of
8.77%. It requires a balloon payment of approximately $490,000 in August
1997.
Subject to the approval of the two banks in question, the Company
anticipates refinancing both loans to eliminate or postpone beyond
fiscal 1997 the two balloon payments. The Company intends to make
contributions to the Trust sufficient to pay all principal and interest
on the loans when due. Because the payment of principal results in the
release of shares from collateral, which shares are then available for
allocation to employees, the principal portion of these contributions is
recorded as compensation expense. Such contributions are, therefore,
expensed to compensation and interest when they are made or accrued. The
compensation and interest elements were as follows:
September 28, September 30, October 1,
1996 1995 1994
_____________ _____________ __________
Compensation $ 246,136 $ 246,136 $ 259,705
Interest 71,996 88,305 114,115
_____________________________________________________________
Total contributions $ 318,132 $ 334,441 $ 373,820
_____________________________________________________________
_____________________________________________________________
On May 31, 1995, the Company completed an asset purchase of the secure
communications business of Datotek, Inc., a subsidiary of AT&T Corp.,
for $3,687,000 (see Note 15). This acquisition was funded partly by the
Company's cash reserves and partly through loans amounting to $2,250,000
from two banks. These loans are payable in equal installments of
principal over a period of five years, plus interest at The First
National Bank of Boston's prime rate plus 1/2 of 1%. However, as of
November 8, 1996, the Company paid off both loans in full.
At September 28, 1996, the Company had a $2,500,000 line of credit at a
rate of prime plus 1/2 of 1%. Availability under the line of credit has
been reduced by $66,910 for outstanding standby letters of credit (see
Note 10). The Company had no borrowing under the line of credit in 1996
or 1995. This line of credit expires on May 1, 1997, unless renewed.
The foregoing bank loans and line of credit are secured by a pledge of
substantially all the assets of the Company.
Page AR-12
Notes to Consolidated Financial Statements (continued)
The future principal payments required as of September 28, 1996, on
these loans were:
Fiscal Year
___________
1997 1,145,175
1998 450,000
1999 450,000
2000 300,000
____________________________________________________
Total principal payments $ 2,345,175
____________________________________________________
____________________________________________________
Because the Company's debt is at rates that vary with the Prime Rate,
or approximate such rates currently, management believes that the fair
value of the debt is essentially equal to its face value.
(6) Income Taxes
The provisions (credits) for income taxes consist of the following:
September 28, September 30, October 1,
1996 1995 1994
_____________ _____________ __________
Current:
Federal $ 473,672 $ 21,983 $ 21,704
State 123,027 7,599 6,393
________________________________________________________________
Total current taxes 596,699 29,582 28,097
________________________________________________________________
Deferred:
Federal (336,330) - -
State (82,987) - -
Total deferred taxes (419,317) - -
Total provision $ 177,382 $ 29,582 $ 28,097
________________________________________________________________
________________________________________________________________
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:
September 28, September 30, October 1,
1996 1995 1994
_____________ _____________ __________
Tax at U.S. statutory rate $ 241,240 $ 40,231 $ 49,009
Benefit of Foreign Sales Corp. (23,604) (29,898) (40,696)
State income taxes,
net of Federal benefit 28,260 3,600 (469)
Tax-exempt interest (6,875) (7,480) (31,250)
Accruals and other 5,861 23,129 51,503
Reduction in valuation (67,500) - -
allowance
_________________________________________________________________________
Total provision $ 177,382 $ 29,582 $ 28,097
_________________________________________________________________________
_________________________________________________________________________
Page AR-13
Notes to Consolidated Financial Statements (continued)
Deferred income taxes consist of the following:
September 28, September 30,
1996 1995
______________ ______________
Goodwill $ 54,874 $ -
Inventory reserve 201,140 213,600
Warranty reserve 243,629 231,502
Payroll related accruals 37,590 40,000
Other 38,238 (63,771)
_________________________________________________________
Total 575,471 421,331
Less: Valuation allowance (353,831) (421,331)
_________________________________________________________
Total $ 221,640 $ -
_________________________________________________________
_________________________________________________________
The valuation allowance relates to uncertainty regarding the Company's
ability to realize prepaid tax assets against future profits.
Refundable income taxes represent estimated refunds from the federal
government from carryback claims.
(7) 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. Options under this plan
generally expire ten years from the date of grant, are exercisable in
cumulative annual increments commencing one year after the date of
grant, and generally vest over a five-year period.
The Company had previously adopted an Incentive Stock Option Plan (the
ISO Plan) that reserved shares of common stock for issuance to employees
at prices not less than the fair market value on the date of grant. The
ISO Plan expired December 15, 1991. Options are still outstanding,
generally expire ten years from the date of grant, are exercisable in
cumulative annual increments commencing one year after the date of
grant, and generally vest over a five-year period.
In 1991, the stockholders approved a Non-Qualified Stock Option Plan
which reserved 50,000 shares of Common Stock for issuance to non-
employee Directors of the Company. These options are issued to
qualifying Directors at prices not less than fair market value on the
date of grant. Options under this plan are exercisable at any time after
the date of grant until expiration, which is five years from the date of
grant.
In fiscal 1996 the Company granted stock options for 50,000 shares to a
key member of management at exercise prices equal to or above the then
current market value. Of these 50,000 shares, the exercise price and
vesting of 40,000 is contingent upon meeting certain milestones that had
not been met by the end of fiscal 1996. If these milestones are met in
the future, that event will fix the vesting period and exercise price.
As a result, the Company will incur compensation expense at that time.
Page AR-14
Notes to Consolidated Financial Statements (continued)
A summary of stock option transactions follows:
ISO Plan SOP Plan Directors'
Number Number SOP Number
of Shares of Shares of Shares
Under Under Under Option Price
Option Option Option per Share
_________ __________ __________ _____________
Outstanding at October 2,
1993 (29,000, 3,175 and
3,750 shares exercisable) 30,400 133,000 3,750 $4.00 - 16.75
Granted - 30,750 1,500 8.00 - 15.37
Exercised (12,900) - - 4.00 - 5.00
Canceled - (105,300) (2,250) 4.00 - 16.75
_________________________________________________________________________________
Outstanding at October 1,
1994 (17,250, 12,050 and
3,000 shares exercisable) 17,500 58,450 3,000 $4.00 - 16.75
Granted - 100,750 1,500 7.00 - 10.98
Exercised (2,750) - (500) 4.00 - 7.00
Canceled (100) (10,300) - 10.50 - 15.37
_________________________________________________________________________________
Outstanding at September 30,
1995 (14,525, 14,530 and
4,000 shares exercisable) 14,650 148,900 4,000 $4.00 - 16.75
Granted - 94,700 2,250 8.12 - 12.79
Exercised (4,300) (4,270) (1,500) 4.00 - 12.75
Canceled (500) (19,275) (750) 8.00 - 15.37
_________________________________________________________________________________
Outstanding at September 28,
1996 (9,850, 37,620 and
4,000 shares exercisable) 9,850 220,055 4,000 $4.00 - 16.75
(8) Profit-Sharing Plan
The Company has a qualified, contributory, trusteed profit-sharing plan
covering substantially all employees. The Company's policy is to fund
contributions as they are accrued. The contributions are allocated based
on the employee's proportionate share of total compensation.
The Company's contributions to the plan are determined by the Board of
Directors and are subject to other specified limitations. Provisions of
approximately $46,000, $40,000, and $20,000 in 1996, 1995 and 1994,
respectively, have been recorded for the Company's contribution to the
profit-sharing plan.
The Company offers no post-retirement benefits as defined in the
Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Post-Retirement Benefits other than Pensions."
(9) Executive Incentive Bonus Plan
The Company has an Executive Incentive Bonus Plan for the benefit of
key management employees. The bonus pool is determined based on the
Company's performance as defined in the plan. During fiscal 1994, no
bonuses were earned but a balance of $71,604 earned in prior years was
distributed among substantially all employees. In fiscal 1995 no
bonuses were earned or paid under this plan. In fiscal 1996 the
Company accrued $104,500 for payment to key management employees
during fiscal 1997. A new plan was adopted by the Board of Directors
for fiscal 1997.
Page AR-15
Notes to Consolidated Financial Statements (continued)
(10) Off-Balance Sheet Risk and Concentration of Credit Risk
At September 28, 1996, and September 30, 1995, the Company was
contingently liable under open standby letters of credit totaling
$66,910 and $70,833, respectively. These letters of credit are issued
in the ordinary course of business to secure the Company's performance
under contracts with its customers. These letters of credit expire as
provided for in the contracts, unless exercised or renewed. To date,
no letters of credit have been exercised. The Company does not expect
to incur any loss associated with these letters of credit.
As of September 28, 1996, 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 credit insurance.
(11) Related Party Transactions
During 1996, 1995 and 1994, the Company leased a sales office from a
related party; lease payments were $1.00 in each year. The fair value
of such rent is estimated to be below $5,000 per year.
A Director of the Company is a member of a law firm which provides
services to the Company.
On June 27,1995, the Company invested $250,800 for a minority interest
in Series B Preferred Stock of Net2Net Corporation. TCC also entered
into a distribution agreement with Net2Net that gave TCC the exclusive
right to sell Net2Net products to certain U.S. Government departments.
Net2Net's President, Stephen McCalmont, is related to the Chairman and
another Director of Technical Communications Corporation, both of whom
are also investors in Net2Net Corporation.A third Director of the
Company is also an investor in Net2Net Corporation. This investment,
which represents less than a 5% interest, has been accounted for using
the cost method.
(12) Commitments and Contingencies
The Board of Directors has authorized payments of $30,000 per year for
five years to the wife of the Chairman of the Board of Directors,
provided that she survives him, in the event of his death at a time
when he is employed by the Company. The Company carries insurance on
the life of the Chairman sufficient to fund this contingent liability
in full.
The Company is party to various claims arising in the normal course of
business. Management believes that these are adequately provided for
or will result in no significant additional liability to the Company.
(13) Major Customers and Export Sales
In fiscal 1996, the Company had three customers, including the U.S.
Government as one customer, representing 54% (26%,16%, and 12%) of net
sales. In fiscal 1995, the Company had three customers, including the
U.S. Government as one customer, representing 57% (24%, 20%, and 13%)
of net sales. In fiscal 1994, the Company had three customers,
including the U.S. Government, representing 52% (28%, 15% and 9%) of
net sales.
Page AR-16
Notes to Consolidated Financial Statements (continued)
A breakdown of net sales is as follows:
September 28, September 30, October 1,
1996 1995 1994
______________ ______________ ____________
Domestic $ 3,633,425 $ 1,535,015 $ 707,735
Foreign $ 10,379,377 $ 8,692,550 $ 8,357,980
__________________________________________________________________
Total $ 14,012,802 $ 10,227,565 $ 9,065,715
__________________________________________________________________
__________________________________________________________________
A summary of foreign sales by geographic area follows:
September 28, September 30, October 1,
1996 1995 1994
_____________ _____________ __________
North America
(excluding the U.S.) 1.3% 2.9% 1.4%
Central and South America 6.7% 6.5% 24.0%
Europe 11.6% 14.2% 7.6%
Mid-East and Africa 46.0% 59.7% 62.8%
Far East 34.4% 16.7% 4.2%
(14) Leases
The Company leases its headquarters and a branch sales office under
operating leases.
The future minimum base rental payments on its triple net headquarters
lease are $146,160 per year for calendar years 1996 through 1997. The
lease expires on December 31, 1997, but can be renewed for one or two
additional two and one-half year terms ending June 30, 2000, and
December 31, 2002. The Company also retains an option to purchase the
building at fair market value but not to exceed $2,262,000,
exercisable at each 2 1/2 year interval during the initial term of the
lease or any renewals thereof.
Base rental expense amounted to $146,160, in each of fiscal years
1996, 1995, and 1994.
(15) Acquisition
Effective May 31, 1995, the Company acquired substantially all of the
assets of Datotek, Inc., a subsidiary of AT&T Corp. Total
consideration paid by the Company was $3,687,000, plus acquisition and
financing costs. The acquisition was financed by the Company's own
capital and a loan from two banks. (The loans from the two banks were
paid off as of November 8, 1996.) Operations resulting from this
acquisition are included in the accompanying consolidated financial
statements from the date of acquisition. The acquisition was accounted
for as a purchase, and accordingly, an allocation of purchase cost to
the Company's assets and liabilities (accounts receivable, inventory,
fixed assets, accounts payable and accruals) was made to reflect fair
values. The allocation results in unallocated excess of purchase cost
over net assets acquired (goodwill) of $1,614,131, which is being
amortized on a straight-line basis over 7 1/2 years. The parties made
an election under the Internal Revenue Code to treat the purchase and
sale agreement as a purchase of assets and assumption of liabilities.
On an unaudited proforma basis, giving effect to the transaction as if
it occurred as of October 1, 1994, net sales for fiscal 1995 would
have been $11,605,000 with a net loss of $235,000 or $.19 per share.
Page AR-17
Notes to Consolidated Financial Statements (continued)
The proforma net sales and net loss do not purport to represent what
the Company's results of operations would have been if such
transaction in fact had occurred on such date or at the beginning of
the period indicated, or to project the Company's financial position
or results of operations for any future date or period.
(16) Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following:
September 28, September 30, Estimated
1996 1995 Useful
Life
______________ ______________ __________
Engineering and
manufacturing equipment $ 1,942,723 $ 1,832,839 3-8 years
Demonstration equipment 785,178 525,635 3-5 years
Furniture and fixtures 1,000,354 806,558 3-8 years
Automobiles 89,899 89,899 5 years
Leasehold Improvements 405,662 371,433 2-5 years
_________________________________________________________________________
Total equipment and
leasehold improvements $ 4,223,816 $ 3,626,364 2-8 years
_________________________________________________________________________
_________________________________________________________________________
(17) Fair Values 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 - The carrying amount of these assets
on the Company's Consolidated Balance Sheet approximates their
fair value because of the short maturity of these instruments.
b.) Long-term Debt - The fair value of this long-term indebtedness
approximates the carrying amount since the variable interest rate
paid reflects fair value.
(18) Risks
The Company is exposed to a number of business risks. These include,
but are not limited to, concentration of its business amongst a
relatively small number of customers (see footnote #13), technological
change (which can cause obsolescence of the Company's products and
inventories), actions of competitors (some of whom have access to
considerably greater financial resources than the Company),
cancellation of major contracts (either before or after award),
variations in market demand, the loss of key personnel, etc. The
Company attempts to protect itself in various ways against such risks,
but its success cannot be guaranteed.
(19) Forward-looking Statements
The foregoing footnotes contain forward-looking statements, such as,
but not by way of limitation, expectations of future debt service
requirements, lease payments, etc. In addition, the financial
statements contain estimates by management that also constitute
forward-looking statements, including but not limited to depreciation
rates, adequate levels of inventory, warranty and other reserves,
current values of assets and liabilities, etc., that involve risks and
uncertainties. Actual values and results may be materially different.
In particular, the value of assets and the adequacy of reserves depend
upon future events which cannot be foreseen at this time because they
may be affected by changes in the needs of the Company's customers,
the products and pricing offered by the Company's competitors, general
economic conditions and other factors.
Page AR-18
Report of Independent Public Accountants
To Technical Communications Corporation:
We have audited the accompanying consolidated balance sheets of Technical
Communications Corporation (a Massachusetts corporation) and its
subsidiaries as of September 28, 1996, and September 30, 1995, and the
related consolidated statements of income, cash flows and stockholders'
equity for the years ended September 28, 1996, September 30, 1995, and
October 1, 1994. 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 September 28,
1996, and September 30, 1995, and the results of their operations and their
cash flows for the years ended September 28, 1996, September 30, 1995, and
October 1, 1994, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
_________________________
Boston, Massachusetts
November 6, 1996
Page AR-19