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
December 27, 1997 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 Identification Number)
incorporation or organization)
100 Domino Drive, Concord, MA 01742-2892
- --------------------------------------- --------------------------------------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (978) 287-5100
---------------
N/A
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(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 January 30, 1998: 1,283,238.
INDEX
Page
----
PART I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets,
as of December 27, 1997 (unaudited) and
September 27, 1997. 1
Condensed Consolidated Statements of Operations,
Three (3) months ended December 27, 1997 and
December 28, 1996 (unaudited). 2
Condensed Consolidated Statements of Cash Flows,
Three (3) months ended December 27, 1997 and
December 28, 1996 (unaudited). 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 7
PART II Other Information 9
Signatures 10
PART I. FINANCIAL INFORMATION--ITEM 1. FINANCIAL STATEMENTS
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 27, 1997
(UNAUDITED) SEPTEMBER 27, 1997
----------------- ------------------
Assets
Current Assets:
Cash and cash equivalents................................................ $ 1,241,377 $ 1,876,748
Accounts receivable--trade, less allowance for doubtful accounts of
$25,000 at 12/27/97 and 9/27/97........................................ 3,602,485 3,259,549
Unbilled revenue......................................................... 1,726,510 198,038
Inventories (Note 1)..................................................... 4,154,626 3,423,979
Other current assets..................................................... 508,619 727,759
----------------- ------------------
Total current assets................................................. $ 11,233,617 $ 9,486,073
----------------- ------------------
Equipment and leasehold improvements....................................... 4,438,004 4,382,655
Less: accumulated depreciation and amortization.......................... 3,331,850 3,200,075
----------------- ------------------
1,106,154 1,182,580
----------------- ------------------
Goodwill................................................................... 1,614,131 1,614,131
Less: accumulated amortization........................................... 555,260 501,533
----------------- ------------------
1,058,871 1,112,598
----------------- ------------------
Other assets............................................................... 755,141 675,002
----------------- ------------------
$ 14,153,783 $ 12,456,253
----------------- ------------------
----------------- ------------------
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable......................................................... $ 1,703,690 $ 861,633
Revolving line of credit (Note 2)........................................ 1,000,000 --
Accrued liabilities:
Compensation and related expenses...................................... 214,292 290,093
Other.................................................................. 1,803,785 1,794,481
----------------- ------------------
Total current liabilities............................................ $ 4,721,767 $ 2,946,207
----------------- ------------------
Stockholders' Equity:
Common stock, par value $.10 per share; authorized 3,500,000 shares;
issued and outstanding 1,283,238 shares at 12/27/97 and 1,273,703
shares at 9/27/97...................................................... 128,324 127,370
Additional paid-in capital............................................... 1,228,197 1,526,110
ESOP deferred compensation (Note 2)...................................... -- (527,772)
Retained earnings........................................................ 8,335,619 8,464,338
Less treasury stock at cost, 35,732 shares and 10,000 shares at
12/27/97 and 9/27/97, respectively................................... (260,124) (80,000)
----------------- ------------------
Total stockholders' equity........................................... $ 9,432,016 $ 9,510,046
----------------- ------------------
$ 14,153,783 $ 12,456,253
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----------------- ------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 1
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
------------------------------------
DECEMBER 27, 1997 DECEMBER 28, 1996
----------------- -----------------
Net Sales.................................................................. $ 2,935,048 $ 3,058,114
Cost of Sales.............................................................. 1,571,086 1,204,752
----------------- -----------------
Gross Profit............................................................... 1,363,962 1,853,362
----------------- -----------------
Operating Expenses:
Selling, general and administrative expenses............................. 1,327,142 1,388,367
Product development costs................................................ 232,991 445,711
----------------- -----------------
1,560,133 1,834,078
----------------- -----------------
Operating Profit (Loss).................................................... (196,171) 19,284
----------------- -----------------
Other Income (Expense):
Interest income.......................................................... 11,389 48,029
Interest expense......................................................... -- (30,174)
Other income (expense)................................................... 13,158 10,918
----------------- -----------------
24,547 28,773
----------------- -----------------
Income (loss) before income taxes...................................... (171,624) 48,057
Provision (benefit) for income taxes....................................... (42,905) 12,106
----------------- -----------------
Net Income (Loss).......................................................... $ (128,719) $ 35,951
----------------- -----------------
----------------- -----------------
Net Income (Loss) Per Common Share (Note 3):
Basic.................................................................... $ (.10) $ .03
Diluted.................................................................. $ (.10) $ .03
Weighted Avg. Shares Used in Computation:
Basic.................................................................... 1,277,880 1,266,203
Diluted.................................................................. 1,277,880 1,308,543
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
------------------------------------
DECEMBER 27, 1997 DECEMBER 28, 1996
----------------- -----------------
Operating Activities:
Net income (loss)........................................................ $ (128,719) $ 35,951
Adjustments to reconcile
net income (loss) to net cash provided (used) by operating activities:
Depreciation and amortization.......................................... 185,501 199,026
Non-cash compensation associated with ESOP............................. -- 20,511
Changes in assets and liabilities:
Decrease (increase) in accounts receivable............................... (342,936) 107,120
(Increase) in unbilled revenue........................................... (1,528,472) --
(Increase) in inventories................................................ (730,647) (655,853)
Decrease in refundable income taxes...................................... 233,426 --
Decrease (increase) in other current assets.............................. (14,286) 18,575
(Increase) in other assets............................................... (80,139) (51,135)
Increase in accounts payable and other accrued liabilities............... 775,560 157,728
----------------- -----------------
Net cash provided (used) by operating activities......................... (1,630,712) (168,077)
Investing Activities:
Additions to equipment and leasehold improvements........................ (55,348) (23,093)
----------------- -----------------
Net cash used by investing activities.................................. (55,348) (23,093)
Financing Activities:
Proceeds from stock issuance............................................. 50,689 12,561
Borrowings under line of credit.......................................... 1,000,000 --
Payment of debt.......................................................... -- (1,670,512)
----------------- -----------------
Net cash provided (used) by financing activities......................... 1,050,689 (1,657,951)
Net (decrease) in cash and cash equivalents.............................. (635,371) (1,849,121)
Cash and cash equivalents at beginning of the period....................... 1,876,748 6,381,026
----------------- -----------------
Cash and cash equivalents at the end of the period......................... $ 1,241,377 $ 4,531,905
----------------- -----------------
----------------- -----------------
Supplemental Disclosures:
Interest paid............................................................ $ -- $ 30,174
Income taxes paid (refunds received), net................................ (233,426) 503,500
NON-CASH TRANSACTIONS
The Company's ESOP was terminated effective October 1, 1997. As a result of
the termination, the Company reacquired the 25,732 of remaining suspense shares
of its common stock in a treasury stock transaction.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STATEMENT OF FAIR PRESENTATION
INTERIM FINANCIAL STATEMENTS. The accompanying unaudited condensed
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 information on footnote 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
Company's consolidated financial statements for the year ending September 27,
1997 as filed with the Securities and Exchange Commission on Form 10-K.
NOTE 1. INVENTORIES
Inventories consisted of the following:
DECEMBER 27, 1997 SEPTEMBER 27, 1997
----------------- ------------------
Finished Goods............................................................. $ 68,803 $ 64,781
Work in Process............................................................ 1,762,333 1,220,152
Raw Materials.............................................................. 2,323,490 2,139,046
----------------- ------------------
$ 4,154,626 $ 3,423,979
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----------------- ------------------
NOTE 2. LONG-TERM DEBT
As of December 27, 1997, the Company had a $3,500,000 line of credit at a
rate of prime plus 1/2 of 1%. This line of credit is secured by a pledge of
substantially all the assets of the Company and is due to mature on May 1, 1998.
Availability under the line of credit had been reduced by $819,419 for
outstanding standby letters of credit (as of December 27, 1997) and borrowings
of $1,000,000 obtained on December 26, 1997. The Company expects to increase its
line of credit during fiscal 1998 in order to accommodate letters of credit and
working capital requirements associated with current and projected customer
orders. Borrowings under the line of credit are expected to be repaid late in
the current fiscal year when one particular order for approximately $7.4 million
is shipped and payment is received from the customer. There were no borrowings
under the line of credit during the quarter ended December 28, 1996.
On November 17, 1989, the Company established the Technical Communications
Corporation Employees' Stock Ownership Trust (the Trust) for the benefit of its
employees. During 1990 and 1991, the Trust borrowed $1,212,500 and $1,287,488,
respectively, from two banks, and purchased 190,350 shares of the Company's
common stock at fair market value. The Company acted as a guarantor on the
outstanding loans and, as a result, recorded the principal balance of such loans
on its balance sheet as short-term and long-term debt with an offsetting charge
to "ESOP Deferred Compensation" within the Stockholders' Equity section.
On April 30, 1997, the Company provided a loan of $82,702 to the Trust in
order to pay off the remaining balance of the 1990 bank loan. This new loan,
which bore interest at 9% per annum, required equal monthly payments of
principal of $3,446, commencing on May 31, 1997. On August 28, 1997, the Company
provided a second loan of $472,222 to the Trust in order to pay off the 1991
bank loan. This second Company loan to the Trust bore interest at 13.6% per
annum and required equal monthly
Page 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. LONG-TERM DEBT (CONTINUED)
principal payments of $9,838 beginning on September 28, 1997. The Employee Stock
Ownership Plan (ESOP) was terminated by the Board of Directors effective October
1, 1997, at which time these loans to the Trust were eliminated and the
remaining 25,732 of unallocated suspense shares were reacquired by the Company
as treasury stock.
Until the ESOP's termination, the Company made contributions to the Trust
sufficient to pay all principal and interest on the various loans when due.
Because the payment of principal resulted in the release of shares from
collateral, which shares were then available for allocation to employees, the
principal portion of these contributions was recorded as compensation expense.
Such contributions were, therefore, expensed to compensation and interest when
they were made or accrued.
On May 31, 1995, the Company completed an asset purchase of the secure
communications business of Datotek, Inc. This acquisition was funded partly by
the Company's own capital and partly through loans amounting to $2,250,000 from
two banks. These loans, which were 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%, were paid in full during November 1996.
NOTE 3. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which
established standards for computing and presenting earnings per share (EPS) for
entities with publicly held common stock. SFAS No. 128 is effective for periods
ending after December 15, 1997, including interim periods, and early adoption
was not permitted. After the effective date, all prior period EPS data presented
must be restated to conform with the provisions of this statement, which
includes the presentation of both a "Basic" and a "Diluted" EPS. Basic EPS has
been computed by dividing net income by the weighted average number of shares of
common stock outstanding during 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.
FOR THE THREE MONTHS ENDED DECEMBER
28, 1996
------------------------------------
PER SHARE
NET INCOME SHARES AMOUNT
----------- ---------- -----------
BASIC EARNINGS (LOSS) PER SHARE............................................. $ 35,951 1,266,203 $ .03
-----
-----
Outstanding dilutive stock options with grant price less than average market
price..................................................................... -- 42,340
----------- ----------
DILUTED EARNINGS (LOSS) PER SHARE........................................... $ 35,951 1,308,543 $ .03
----------- ---------- -----
----------- ---------- -----
FOR THE THREE MONTHS ENDED DECEMBER
27, 1997
------------------------------------
PER SHARE
NET LOSS SHARES AMOUNT
----------- ---------- -----------
BASIC EARNINGS (LOSS) PER SHARE............................................. $ (128,719) 1,277,880 $ (.10)
-----
-----
Outstanding dilutive stock options with grant price less than average market
price..................................................................... -- --
----------- ----------
DILUTED EARNINGS (LOSS) PER SHARE........................................... $ (128,719) 1,277,880 $ (.10)
----------- ---------- -----
----------- ---------- -----
Page 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. COMMITMENTS AND CONTINGENCIES
The Company is not currently party to any lawsuit, and is not aware of any
material pending legal proceedings. See Part II, "Other Information," Item 1,
"Legal Proceedings."
Page 6
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.
The Company's backlog of firm orders as of December 27, 1997 was $8,389,548
representing a decrease of $2,251,141 from $10,640,689 reported as of September
27, 1997. The decrease is predominantly the result of recognizing $1,528,472 in
revenue under the percentage of completion method on a long-term contract to be
delivered later this fiscal year. The Company expects to deliver substantially
all of this backlog in fiscal 1998.
Net sales for the quarter ended December 27, 1997 and December 28, 1996, were
$2,935,048 and $3,058,114, respectively. This decrease of 4% in first quarter
net sales was due to both the timing of deliveries on specific contracts and the
revenue value of the work completed on the long-term contract noted above.
Gross profit for the first quarter of fiscal year 1998 was $1,363,962, as
compared to gross profit of $1,853,362 for the first quarter of fiscal year
1997. This represented a 26% decrease in gross profit. Gross profit expressed as
a percentage of sales was 46% in the first quarter of fiscal 1998 as compared to
61% in the first quarter of the prior year. This decline as a percentage of
sales was primarily the result of the Company's shipment of two large orders
with unusually high gross profit margins in December 1996 and the conservative
recording of a low gross profit margin on the previously mentioned long-term
contract accounted for under the percentage of completion method.
Operating expenses for the first quarter of fiscal 1998 were $1,560,133
compared to operating expenses in the first quarter of fiscal 1997 of
$1,834,078. This decrease of $273,945, or 15%, was primarily due to a
decrease in engineering consulting expense for product development,
capitalization of Keynet-TM-II, the Company's next generation of key and
device management system software, as well as a reduction in sales
commissions related to the timing of shipments.
The Company incurred a net loss of $128,719 for the first quarter of fiscal 1998
as compared to after-tax income of $35,951 for the same period last year. The
decline in profitability for the quarter is attributed to the decrease in gross
profit margin as described above.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments decreased by $635,371 or 34% to $1,241,377 as of
December 27, 1997, from a balance of $1,876,748 at September 27, 1997. This
decrease was primarily due to the loss of $128,719 for the period, a $730,647
increase in inventory, and an increase in unbilled revenue of $1,528,472 as a
result of the long-term percentage of completion contract discussed under
Results of Operations. This reduction in cash has been partially offset by the
Company's borrowing of $1,000,000 under its existing line of credit, as
previously discussed in Note 2, and a $775,560 increase in accounts payable and
accrued expenses. The current ratio declined to 2.4:1 at December 27, 1997,
compared to
KEYNET IS A TRADEMARK OF TECHNICAL COMMUNICATIONS CORPORATION.
Page 7
3.2:1 as of September 27, 1997. The decline in the ratio was caused primarily by
the $1,000,000 borrowing under the line of credit and the increase in accounts
payable and accrued expenses.
Information on the Company's long-term debt is to be found on Page 4, Note 2,
"Long-Term Debt" of this Form 10-Q.
Management anticipates no unusual capital expenditures during the remainder of
fiscal 1998. As discussed in Note 2, however, Management anticipates that the
Company will need to increase its line of credit above the current $3,500,000
limit in order to accommodate letters of credit and working capital requirements
associated with current and projected customer orders. No assurances can be
given that such an increased line of credit will be available on satisfactory
terms, if at all. If the Company is unable to obtain an increase or renewal of
its existing line of credit, its operations can be substantially adversely
affected.
Page 8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
No material legal proceedings are pending to which the Company is a party or
of which any of its property is the subject.
ITEM 2. CHANGES IN SECURITIES:
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: Statement regarding computation of per-share earnings: reference is
made to Note 3 of the Notes to the Condensed Consolidated Financial
Statements on page 5 of this Quarterly Report on Form 10-Q.
b. Reports on Form 8-K: None.
Page 9
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 9, 1998 By: /s/ ROLAND S. GERARD
Date -----------------------------------------
ROLAND S. GERARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
February 9, 1998 By: /s/ HERBERT A. LERNER
Date -----------------------------------------
HERBERT A. LERNER, CHIEF FINANCIAL
OFFICER
Page 10