Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
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þ |
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Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 28, 2008
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o |
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Transition report under Section 13 or 15(d) of the Exchange Act |
For the transition period from
_____
to _____
Commission File Number: 0-8588
TECHNICAL COMMUNICATIONS CORPORATION
(Exact name of small business issuer as specified in its charter)
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Massachusetts
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04-2295040 |
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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100 Domino Drive, Concord, MA
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01742-2892 |
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(Address of principal executive offices)
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(Zip Code) |
Issuers telephone number, including area code: (978) 287-5100
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 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 þ No
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
State the number of shares outstanding of each of the issuers classes of common equity, as
of the latest practicable date. 1,433,535 shares of Common Stock, $.10 par value,
outstanding as of August 8, 2008.
Transitional Small Business Disclosure Format (check one): Yes o No þ
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
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June 28, 2008 |
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September 29, 2007 |
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(Unaudited) |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
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$ |
4,050,215 |
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$ |
2,622,288 |
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Accounts receivable trade, less allowance of $25,000
at June 28, 2008 and $35,000 at September 29, 2007 |
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394,560 |
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420,527 |
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Inventories, net |
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1,711,946 |
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1,908,157 |
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Other current assets |
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119,076 |
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96,051 |
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Total current assets |
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6,275,797 |
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5,047,023 |
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Equipment and leasehold improvements |
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3,076,934 |
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2,961,268 |
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Less: accumulated depreciation and amortization |
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(2,887,797 |
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(2,853,906 |
) |
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Equipment and leasehold improvements, net |
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189,137 |
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107,362 |
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Total Assets |
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$ |
6,464,934 |
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$ |
5,154,385 |
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Liabilities and Stockholders Equity |
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Current Liabilities: |
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Accounts payable |
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$ |
150,371 |
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$ |
253,683 |
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Accrued liabilities |
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Accrued compensation and related expenses |
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398,060 |
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449,111 |
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Accrued expenses |
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171,196 |
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263,235 |
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Total current liabilities |
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719,627 |
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966,029 |
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Stockholders Equity: |
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Common stock, par value $.10 per share;
7,000,000 shares authorized; 1,433,767 shares issued
and outstanding at June 28, 2008 and 1,382,767 at
September 29, 2007 |
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143,377 |
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138,277 |
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Additional paid-in capital |
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1,921,211 |
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1,517,599 |
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Retained earnings |
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3,680,719 |
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2,532,480 |
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Total stockholders equity |
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5,745,307 |
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4,188,356 |
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Total Liabilities and Stockholders Equity |
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$ |
6,464,934 |
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$ |
5,154,385 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 2
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
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Three Months Ended |
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June 28, 2008 |
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June 30, 2007 |
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Net sales |
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$ |
1,699,817 |
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$ |
1,119,531 |
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Cost of sales |
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679,127 |
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369,388 |
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Gross profit |
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1,020,690 |
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750,143 |
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Operating expenses: |
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Selling, general and
administrative expenses |
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658,957 |
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407,239 |
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Product development costs |
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192,218 |
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258,592 |
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Total operating expenses |
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851,175 |
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665,831 |
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Operating income |
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169,515 |
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84,312 |
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Other income: |
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Interest income |
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16,896 |
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24,326 |
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Total other income |
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16,896 |
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24,326 |
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Net income before provision for income taxes |
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186,411 |
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108,638 |
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Provision for income taxes |
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Net income |
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$ |
186,411 |
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$ |
108,638 |
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Net income per common share: |
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Basic |
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$ |
0.13 |
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$ |
0.08 |
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Diluted |
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$ |
0.11 |
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$ |
0.07 |
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Weighted average shares: |
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Basic |
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1,433,535 |
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1,378,025 |
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Diluted |
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1,722,608 |
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1,597,152 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 3
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
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Nine Months Ended |
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June 28, 2008 |
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June 30, 2007 |
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Net sales |
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$ |
5,647,929 |
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$ |
3,169,341 |
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Cost of sales |
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2,083,831 |
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917,235 |
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Gross profit |
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3,564,098 |
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2,252,106 |
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Operating expenses: |
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Selling, general and
administrative expenses |
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1,709,298 |
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1,267,412 |
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Product development costs |
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779,499 |
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745,537 |
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Total operating expenses |
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2,488,797 |
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2,012,949 |
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Operating income |
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1,075,301 |
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239,157 |
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Other income (expense): |
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Interest income |
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72,938 |
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65,189 |
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Interest expense |
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(624 |
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Total other income: |
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72,938 |
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64,565 |
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Net income before provision for income taxes |
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1,148,239 |
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303,722 |
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Provision for income taxes |
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Net income |
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$ |
1,148,239 |
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$ |
303,722 |
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Net income per common share: |
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Basic |
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$ |
0.82 |
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$ |
0.22 |
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Diluted |
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$ |
0.69 |
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$ |
0.20 |
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Weighted average shares: |
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Basic |
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1,407,808 |
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1,374,358 |
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Diluted |
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1,667,364 |
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1,521,628 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 4
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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Nine Months Ended |
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June 28, 2008 |
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June 30, 2007 |
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Operating Activities: |
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Net income |
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$ |
1,148,239 |
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$ |
303,722 |
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Adjustments to reconcile net income to net cash
provided by operating activities: |
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Depreciation and amortization |
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33,891 |
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22,900 |
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Stock-based compensation |
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125,852 |
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74,313 |
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Changes in assets and liabilities: |
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Accounts receivable |
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25,967 |
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(89,422 |
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Inventories |
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196,211 |
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(277,677 |
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Other current assets |
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(23,025 |
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(19,651 |
) |
Accounts payable and other accrued liabilities |
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(246,402 |
) |
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282,943 |
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Net cash provided by operating activities |
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1,260,733 |
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297,128 |
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Investing Activities: |
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Additions to equipment and leasehold improvements |
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(115,666 |
) |
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(36,345 |
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Net cash used in investing activities |
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(115,666 |
) |
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(36,345 |
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Financing Activities: |
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Proceeds from stock issuance |
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282,860 |
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8,472 |
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Net cash provided by financing activities |
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282,860 |
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8,472 |
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Net increase in cash and cash equivalents |
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1,427,927 |
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269,255 |
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Cash and cash equivalents at beginning of the period |
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2,622,288 |
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1,870,713 |
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Cash and cash equivalents at the end of the period |
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$ |
4,050,215 |
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$ |
2,139,968 |
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Supplemental Disclosures: |
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Interest paid |
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$ |
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$ |
624 |
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Income taxes paid |
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19,000 |
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|
503 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 5
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STATEMENT OF FAIR PRESENTATION
Interim Financial Statements. The accompanying interim unaudited condensed consolidated
financial statements of Technical Communications Corporation (the Company or TCC) and its
wholly-owned subsidiary include all adjustments which are, in the opinion of management, necessary
for a fair presentation of the results of operations for the periods presented and in order to make
the financial statements not misleading. All such adjustments are of a normal recurring nature.
Interim results are not necessarily indicative of the results to be expected for the fiscal year
ending September 27, 2008.
Certain footnote disclosures normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted as allowed by Securities
and Exchange Commission rules and regulations. The accompanying unaudited condensed consolidated
financial statements should be read in conjunction with the Companys audited consolidated
financial statements and the notes thereto in the Companys Annual Report on Form 10-KSB for the
fiscal year ended September 29, 2007.
NOTE 1. Summary of Significant Accounting Policies and Significant Judgments and
Estimates
Basis of Presentation The accompanying condensed consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The discussion and analysis of our financial condition and results of operations are based on our
consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these condensed
consolidated financial statements requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported revenues and expenses during
the reported periods.
On an ongoing basis, management evaluates its estimates and judgments, including but not limited to
those related to revenue recognition, receivable reserves, inventory reserves and income taxes.
Management bases its estimates on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions or
conditions.
The accounting policies that management believes are most critical to aid in fully understanding
and evaluating our reported financial results include the following:
Revenue Recognition
The Company recognizes revenue from product sales in accordance with Staff Accounting Bulletin No.
101, Revenue Recognition, as updated by Staff Accounting Bulletin No. 104. Product revenue is
recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable,
delivery of the product to the customer has occurred and we have determined that collection of the
fee is probable. Title to the product generally passes upon shipment of the product, as the
products are shipped FOB shipping point, except for certain foreign shipments. If the product
requires installation to be performed by TCC, all revenue related to the product is deferred and
recognized upon the completion of the installation. The Company provides for a warranty reserve at
the time the product revenue is recognized.
Page 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
The Company performs funded research and development and product development for commercial
companies and government agencies under both cost reimbursement and fixed-price contracts. Cost
reimbursement contracts provide for the reimbursement of allowable costs and, in some situations,
the payment of a fee. These contracts may contain incentive clauses providing for increases or
decreases in the fee depending on how actual costs compare with a budget. Revenue from
reimbursement contracts is recognized as services are performed. On fixed-price contracts that are
expected to exceed one year in duration, revenue is recognized pursuant to the percentage of
completion method based upon the proportion of costs incurred to the total estimated costs for the
contract. In each type of contract, the Company receives periodic progress payments or payment
upon reaching interim milestones. All payments to TCC for work performed on contracts with
agencies of the U.S. government are subject to audit and adjustment by the Defense Contract Audit
Agency. Adjustments are recognized in the period made. When the current estimates of total
contract revenue and contract costs for commercial product development contracts indicate a loss, a
provision for the entire loss on the contract is recorded. Any losses incurred in performing
funded research and development projects are recognized as funded research and development expenses
as incurred.
Cost of product revenue includes material, labor and overhead. Costs incurred in connection with
funded research and development and other revenue arrangements are included in cost of sales.
Inventory
The Company values inventory at the lower of actual cost to purchase and/or manufacture or the
current estimated market value of the inventory. A review is periodically performed of inventory
quantities on hand and the Company records a provision for excess and/or obsolete inventory based
primarily on the estimated forecast of product demand, as well as historical usage. Due to the
custom and specific nature of certain products, demand and usage for these products and materials
can fluctuate significantly. A significant decrease in demand for these products could result in a
short-term increase in the cost of inventory purchases and an increase of excess inventory
quantities on hand. In addition, the Companys industry is characterized by rapid technological
change, frequent new product development and rapid product obsolescence, any of which could result
in an increase in the amount of obsolete inventory quantities on hand. Therefore, although the
Company makes every effort to ensure the accuracy of its forecasts of future product demand, any
significant unanticipated or unfavorable changes in demand or technological developments could have
a significant negative impact on the value of inventory and would reduce our reported operating
results.
Accounts Receivable
Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the
future. The estimated allowance for uncollectible amounts is based primarily on a specific
analysis of accounts in the receivable portfolio and historical write-off experience. While
management believes the allowance to be adequate, if the financial condition of our customers were
to deteriorate, resulting in any impairment of their ability to make payments, additional
allowances may be required, which would reduce our net income.
Accounting for Income Taxes
The preparation of our consolidated financial statements requires us to estimate our income taxes
in each of the jurisdictions in which we operate, including those outside the United States, which
may subject the Company to certain risks that ordinarily would not be expected in the United
States. The income tax accounting process involves estimating our actual current exposure together
with assessing temporary differences resulting from differing treatments of items, such as
depreciation, for tax and accounting purposes. These differences result in the recognition of deferred tax assets and
liabilities. We must then record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized.
Page 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
Significant management judgment is required in determining our provision for income taxes, our
deferred tax assets and liabilities, and any valuation allowance recorded against deferred tax
assets. We have recorded a full valuation allowance against our deferred tax assets as of June 28,
2008 and September 29, 2007, due to uncertainties related to our ability to utilize these assets.
Realization of the deferred tax assets is dependent upon the Companys ability to generate
sufficient future taxable income and, if necessary, execution of tax planning strategies. The
valuation allowance is based on our estimates of taxable income by jurisdiction and the period over
which our deferred tax assets will be recoverable. In the event that actual results differ from
these estimates or we adjust these estimates in future periods, we may need to adjust our valuation
allowance, which could materially impact our financial position and results of operation.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. FIN 48 prescribes
a recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. This interpretation
also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company adopted FIN 48 as of September 30, 2007.
FIN 48 requires that an enterprise determine whether it is more likely than not that a tax position
will be sustained upon examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. A tax position that meets the
more-likely-than-not threshold is then measured to determine the amount of benefit to recognize in
the financial statements. Based on its assessment, the Company has concluded that there are no
significant uncertain tax positions that require recognition in the financial statements as of June
28, 2008.
The Company files federal and state income tax returns. The Company has had accumulated losses,
which are still available to offset future income, since fiscal year 2000. Since the net operating
losses may potentially be utilized in future years to reduce taxable income, the Companys tax
years since fiscal 2000 remain open to examination by the major taxing jurisdictions in which the
Company is subject.
With respect to any future uncertain tax positions, the Company intends to record interest and
penalties, if any, as a component of income tax expense.
Stock-Based Compensation
Effective October 1, 2006, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment and related interpretations (SFAS No. 123R) using the
modified prospective method and, accordingly, has not restated prior period results. SFAS No. 123R
establishes the method for accounting for equity instruments issued in exchange for employee
services. Under SFAS No. 123R, share-based compensation cost is measured at the grant date based on
the calculated fair value of the award. The expense is recognized over the employees requisite
service period, generally the vesting period of the award. SFAS No. 123R also requires the related
excess tax benefit received upon exercise of stock options, if any, to be reflected in the
statement of cash flows as a financing activity rather than an operating activity.
Page 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
In accordance with SFAS No. 123R and Staff Accounting Bulletin No. 107, Share-based Payment, the
Company selected the Black-Scholes option pricing model as the most appropriate method for
determining the estimated fair value of stock awards. The Black-Scholes method of valuation
requires several assumptions: (1) the expected term of the stock award, (2) the expected future
stock price volatility over the expected term and (3) a risk-free interest rate. The expected term
represents the expected period of time the Company believes the options will be outstanding based
on historical information. Estimates of expected future stock price volatility are based on the
historic volatility of the Companys common stock and the risk free interest rate is based on the
U.S. Treasury Note rate. The Company utilizes a forfeiture rate based on an analysis of its actual
experience. The forfeiture rate is not material to the calculation of share-based compensation. The
Company also assumes the dividend yield will be zero. The fair value of options at date of grant
was estimated with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 28, 2008 |
|
|
June 30, 2007 |
|
Assumptions: |
|
|
|
|
|
|
|
|
Option life |
|
5 years |
|
|
5 years |
|
Risk-free interest rate |
|
|
3.18 |
% |
|
|
4.58 |
% |
Stock volatility |
|
|
90 |
% |
|
|
149 |
% |
Dividend yield |
|
|
-0- |
|
|
|
-0- |
|
There were 34,000 options granted during the nine months ended June 28, 2008 and 16,500 options
granted during the nine months ended June 30, 2007. The following table summarizes share-based
compensation costs included in the Companys consolidated statement of operations for the three and
nine months ended June 28, 2008 and June 30, 2007 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2008 |
|
|
June 30, 2007 |
|
|
|
3 months |
|
|
9 months |
|
|
3 months |
|
|
9 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
$ |
1,692 |
|
|
$ |
5,587 |
|
|
$ |
1,769 |
|
|
$ |
5,159 |
|
Selling, general and administrative |
|
|
3,022 |
|
|
|
86,062 |
|
|
|
14,788 |
|
|
|
46,457 |
|
Product development costs |
|
|
13,683 |
|
|
|
34,203 |
|
|
|
7,993 |
|
|
|
22,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
before taxes |
|
$ |
18,397 |
|
|
$ |
125,852 |
|
|
$ |
24,550 |
|
|
$ |
74,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 28, 2008 and June 30, 2007, there was $211,302 and $192,542, respectively, of
unrecognized compensation costs related to options granted. The unrecognized compensation will be
recognized over a period of approximately five years.
The Company had the following stock option plans outstanding as of June 28, 2008: the Technical
Communications Corporation 1991 Stock Option Plan, the 2001 Stock Option Plan and the 2005
Non-Statutory Stock Option Plan. There are an aggregate 850,000 shares authorized under these
plans, of which 574,034 and 615,834 were outstanding at June 28, 2008 and June 30, 2007,
respectively. Vesting periods are at the discretion of the Board of Directors and typically range
between one and five years. Options under these plans are granted with an exercise price equal to
at least the fair market value at time of grant and have a term of five or ten years from the date
of grant. As of June 28, 2008, there were no shares available for new option grants under the 1991
Stock Option Plan or the 2001 Stock Option Plan, and there were 22,500 shares available for grant
under the 2005 Non-Statutory Stock Option Plan.
Page 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
The following tables summarize stock option activity during the first nine months of 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
Number of |
|
|
Weighted Average |
|
|
Weighted Average |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Contractual Life |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 29, 2007 |
|
|
612,034 |
|
|
$ |
3.12 |
|
|
|
|
|
Grants |
|
|
34,000 |
|
|
|
|
|
|
|
|
|
Exercises |
|
|
(51,000 |
) |
|
|
|
|
|
|
|
|
Cancellations |
|
|
(21,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 28, 2008 |
|
|
574,034 |
|
|
$ |
3.01 |
|
|
4.66 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
Information related to the stock options outstanding as of June 28, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
|
|
|
|
|
|
Remaining |
|
|
Weighted |
|
|
Exercisable |
|
|
Weighted- |
|
Range of |
|
|
Number of |
|
|
Contractual |
|
|
Average |
|
|
Number of |
|
|
Average |
|
Exercise Prices |
|
|
Shares |
|
|
Life (years) |
|
|
Exercise Price |
|
|
Shares |
|
|
Exercise Price |
|
$0.01 - $1.00 |
|
|
|
160,334 |
|
|
|
4.31 |
|
|
$ |
0.96 |
|
|
|
160,334 |
|
|
$ |
0.96 |
|
$1.01 - $2.00 |
|
|
|
1,200 |
|
|
|
3.56 |
|
|
$ |
1.27 |
|
|
|
1,200 |
|
|
$ |
1.27 |
|
$2.01 - $3.00 |
|
|
|
68,200 |
|
|
|
4.61 |
|
|
$ |
2.56 |
|
|
|
60,460 |
|
|
$ |
2.51 |
|
$3.01 - $4.00 |
|
|
|
302,800 |
|
|
|
4.24 |
|
|
$ |
3.73 |
|
|
|
268,700 |
|
|
$ |
3.75 |
|
$4.01 - $5.00 |
|
|
|
3,500 |
|
|
|
4.97 |
|
|
$ |
4.71 |
|
|
|
2,300 |
|
|
$ |
4.57 |
|
$5.01 - $10.00 |
|
|
|
38,000 |
|
|
|
9.53 |
|
|
$ |
6.69 |
|
|
|
14,800 |
|
|
$ |
7.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
574,034 |
|
|
|
4.66 |
|
|
$ |
3.13 |
|
|
|
507,794 |
|
|
$ |
2.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of the Companys in-the-money outstanding and exercisable options
as of June 28, 2008 was $1,496,224. Nonvested common stock options are subject to the risk of
forfeiture until the fulfillment of specified conditions.
Newly Issued Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosure requirements regarding fair value measurement. SFAS
No. 157 is effective for fiscal years beginning after November 15, 2007. In November 2007, the
FASB deferred the effective date of SFAS No. 157 until November 15, 2008 for all non-financial
assets and liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis. The Company is currently reviewing the statement to
determine the impact and materiality of its adoption by the Company, if any.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities Including an Amendment of Statement
of Financial Accounting Standards No. 115 (SFAS No. 159), which permits companies to choose to
measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.
The Company is currently reviewing the statement to determine the impact and materiality of its
adoption by the Company, if any.
Page 10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
NOTE 2. Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 28, 2008 |
|
|
September 29, 2007 |
|
|
|
(unaudited) |
|
|
|
|
|
Finished goods |
|
$ |
51,834 |
|
|
$ |
408,995 |
|
Work in process |
|
|
639,690 |
|
|
|
478,883 |
|
Raw materials |
|
|
1,020,422 |
|
|
|
1,020,279 |
|
|
|
|
|
|
|
|
|
|
$ |
1,711,946 |
|
|
$ |
1,908,157 |
|
|
|
|
|
|
|
|
NOTE 3. Income Taxes
For the nine months ended June 28, 2008 the Company used available tax loss carryforwards
against pre-tax income of $1,148,239 such that there is no tax provision recognized in the income
statement.
The valuation allowance relates to uncertainty with respect to the Companys ability to realize its
deferred tax assets. As of June 28, 2008, the Company had available tax loss carryforwards for
federal income tax purposes of approximately $4,184,000, expiring through 2026.
NOTE 4. Earnings Per Share
In accordance with SFAS No. 128, Earnings Per Share, basic and diluted earnings per share were
calculated as follows (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2008 |
|
|
June 30, 2007 |
|
|
|
3 months |
|
|
9 months |
|
|
3 months |
|
|
9 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
186,411 |
|
|
$ |
1,148,239 |
|
|
$ |
108,638 |
|
|
$ |
303,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic |
|
|
1,433,535 |
|
|
|
1,407,808 |
|
|
|
1,378,025 |
|
|
|
1,374,358 |
|
Dilutive effect of stock options |
|
|
289,073 |
|
|
|
259,556 |
|
|
|
219,127 |
|
|
|
147,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted |
|
|
1,722,608 |
|
|
|
1,667,364 |
|
|
|
1,597,152 |
|
|
|
1,521,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share |
|
$ |
0.13 |
|
|
$ |
0.82 |
|
|
$ |
0.08 |
|
|
$ |
0.22 |
|
Diluted income per share |
|
$ |
0.11 |
|
|
$ |
0.69 |
|
|
$ |
0.07 |
|
|
$ |
0.20 |
|
Outstanding potentially dilutive stock options, which were not included in the earnings per share
calculations, as their inclusion would have been anti-dilutive, were 34,000 (for the three and nine
month period) at June 28, 2008 and 204,500 (for the nine month period) and 76,500 (for the three
month period) at June 30, 2007.
NOTE 5. Major Customers and Export Sales
During the quarter ended June 28, 2008, the Company had two customers that represented 92% (69% and
23%, respectively) of net sales as compared to the same period in fiscal 2007 where three customers
represented 96% (50%, 24% and 22%, respectively) of net sales. During the nine months ended June
28, 2008, the Company had two customers that represented 85% (61% and 24%, respectively) of net
sales as compared to the same period in fiscal 2007 where two customers represented 58% (44% and
14%, respectively) of net sales.
Page 11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
A breakdown of foreign and domestic net sales is as follows (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2008 |
|
|
June 30, 2007 |
|
|
|
3 months |
|
|
9 months |
|
|
3 months |
|
|
9 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
1,662,206 |
|
|
$ |
5,260,437 |
|
|
$ |
1,104,711 |
|
|
$ |
2,754,292 |
|
Foreign |
|
|
37,611 |
|
|
|
387,492 |
|
|
|
14,820 |
|
|
|
415,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
$ |
1,699,817 |
|
|
$ |
5,647,929 |
|
|
$ |
1,119,531 |
|
|
$ |
3,169,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company sold products into 11 countries during the nine months ended June 28, 2008 and 14
countries during the nine months ended June 30, 2007. A sale is attributed to a foreign country
based on the location of the contracting party. Domestic revenue may include the sale of products
shipped through domestic resellers or manufacturers to international destinations. The table below
summarizes our foreign revenues by country as a percentage of total foreign revenue (unaudited).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2008 |
|
|
June 30, 2007 |
|
|
|
3 months |
|
|
9 months |
|
|
3 months |
|
|
9 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thailand |
|
|
72.6 |
% |
|
|
13.6 |
% |
|
|
33.3 |
% |
|
|
1.2 |
% |
Canada |
|
|
20.3 |
% |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
Saudi Arabia |
|
|
|
|
|
|
24.4 |
% |
|
|
|
|
|
|
1.5 |
% |
United Kingdom |
|
|
|
|
|
|
23.0 |
% |
|
|
|
|
|
|
|
|
Sri Lanka |
|
|
|
|
|
|
15.2 |
% |
|
|
|
|
|
|
3.4 |
% |
Colombia |
|
|
|
|
|
|
10.2 |
% |
|
|
37.0 |
% |
|
|
1.5 |
% |
Lebanon |
|
|
|
|
|
|
9.2 |
% |
|
|
|
|
|
|
|
|
Morocco |
|
|
|
|
|
|
|
|
|
|
14.0 |
% |
|
|
3.2 |
% |
Indonesia |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28.1 |
% |
Sweden |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.7 |
% |
Bahrain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.1 |
% |
Italy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.5 |
% |
Other |
|
|
7.1 |
% |
|
|
2.4 |
% |
|
|
15.7 |
% |
|
|
6.8 |
% |
A summary of foreign revenue, as a percentage of total foreign revenue by geographic area, is as
follows (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2008 |
|
|
June 30, 2007 |
|
|
|
3 months |
|
|
9 months |
|
|
3 months |
|
|
9 months |
|
|
North America |
|
|
20.3 |
% |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
Central and South America |
|
|
|
|
|
|
10.2 |
% |
|
|
37.0 |
% |
|
|
1.5 |
% |
Europe |
|
|
|
|
|
|
24.6 |
% |
|
|
2.5 |
% |
|
|
42.2 |
% |
Mid-East and Africa |
|
|
6.5 |
% |
|
|
49.5 |
% |
|
|
21.6 |
% |
|
|
26.8 |
% |
Far East |
|
|
73.2 |
% |
|
|
13.7 |
% |
|
|
38.9 |
% |
|
|
29.5 |
% |
Page 12
Item 2. Managements Discussion and Analysis or Plan of Operation
Forward-Looking Statements
Certain statements contained herein or as may otherwise be incorporated by reference herein that
are not purely historical constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements include but are not limited
to statements regarding anticipated operating results, future earnings, and the Companys ability
to achieve growth and profitability. Such forward-looking statements involve known and unknown
risks, uncertainties and other 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 Companys
ability to secure adequate capital resources. Such risks, uncertainties and other factors could
cause the actual results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements expressed or implied by
such forward-looking statements. For a more detailed discussion of the risks facing the Company,
see the Companys filings with the Securities and Exchange Commission, including the Companys
Quarterly Reports on Form 10-QSB for the fiscal quarters ended December 29, 2007 and March 29, 2008
and the Companys Annual Report on Form 10-KSB for the fiscal year ended September 29, 2007.
Overview
The Company is in the business of designing, developing, manufacturing, distributing, marketing and
selling communications security devices and equipment that utilize various methods of encryption to
protect the information being transmitted. Encryption is a technique for rendering information
unintelligible, which information can then be reconstituted if the recipient possesses the right
decryption key. The Company manufactures several standard secure communications products and also
provides custom-designed, special-purpose secure communications products for both domestic and
international customers. The Companys products consist primarily of voice, data and facsimile
encryptors, and revenue is generated primarily from the sale of these products, which have
traditionally been made directly or indirectly to foreign governments, which include purchases by
domestic customers who in turn sell to foreign governments. We have also sold these products to
commercial entities and U.S. government agencies. We generate additional revenues from contract
engineering services performed for certain government agencies, both domestic and foreign.
Critical Accounting and Significant Judgments and Estimates
There have been no material changes in the Companys critical accounting policies or critical
accounting estimates since September 29, 2007, nor have we adopted any accounting policy that has
or will have a material impact on our consolidated financial statements. For further discussion of
our accounting policies see Note 1, Summary of Significant Accounting Policies and Significant
Judgments and Estimates in the Notes to Condensed Consolidated Financial Statements in this
Quarterly Report on Form 10-QSB and the Notes to Consolidated Financial Statements in our Annual
Report on Form 10-KSB for the fiscal year ended September 29, 2007.
Page 13
Results of Operations
Three Months ended June 28, 2008 as compared to Three Months ended June 30, 2007
Net Sales
Net sales for the quarter ended June 28, 2008 were $1,700,000, as compared to $1,120,000 for the
quarter ended June 30, 2007, an increase of 52%. Sales for the third quarter of fiscal 2008
consisted of $1,662,000, or 98%, from domestic sources and $38,000, or 2%, from international
customers as compared to the same period in fiscal 2007, during which sales consisted of
$1,105,000, or 99%, from domestic sources and $15,000, or 1%, from international customers.
Foreign sales consisted of shipments to four different countries during the quarter ended June 28,
2008 and six different countries during the quarter ended June 30, 2007. A sale is attributed to a
foreign country based on the location of the contracting party. Domestic revenue may include the
sale of products shipped through domestic resellers or manufacturers to international destinations.
The table below summarizes our principal foreign sales by country, during the third fiscal quarters
of 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Thailand |
|
$ |
27,000 |
|
|
$ |
5,000 |
|
Other |
|
|
11,000 |
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
38,000 |
|
|
$ |
15,000 |
|
|
|
|
|
|
|
|
Revenue for the third quarter of fiscal 2008 was primarily derived from the sale of the Companys
narrowband radio encryptors to a U. S. radio manufacturer amounting to $1,171,000. In addition, the
Company had billings under a program with the U.S. government for engineering services work
amounting to $400,000.
Revenue for the third quarter of fiscal 2007 was primarily derived from the sale of our narrowband
radio encryptors to two U. S. customers amounting to $557,000 and $250,000, respectively. During
the second quarter of fiscal 2007 we finalized a program with the U.S. government for $1.4 million
for engineering services work. This project generated $272,000 in revenue during the third quarter
ended June 30, 2007.
Gross Profit
Gross profit for the third quarter of fiscal 2008 was $1,021,000 as compared to gross profit of
$750,000 for the same period of fiscal 2007, an increase of 36%. Gross profit expressed as a
percentage of sales was 60% for the third quarter of fiscal 2008 as compared to 67% for the same
period in fiscal 2007. The decrease in gross profit as a percentage of sales was primarily
associated with higher margin products sold during the third quarter of 2007.
Page 14
Operating Costs and Expenses
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the third quarter of fiscal 2008 were $659,000, as
compared to $407,000 for the same quarter in fiscal 2007. This increase of 62% was primarily
attributable to an increase in general and administrative expenses of $49,000 and an increase in
selling and marketing expenses of $203,000 during the third quarter of the 2008 fiscal year.
The increase in general and administrative costs during the third quarter of 2008 was primarily
attributable to an increase in personnel related costs of $67,000, offset by a decrease in
recruiting costs of $12,000 and a decrease in the recognition of stock based compensation expense
of $12,000.
The increase in selling and marketing costs was primarily attributable to an increase in third
party sales and marketing activities of $75,000, an increase in new product evaluation activities
of $35,000 and an increase in bid and proposal efforts of $82,000 as compared to the same period in
fiscal 2007.
Product Development Costs
Product development costs for the quarter ended June 28, 2008 were $192,000, compared to $259,000
for the quarter ended June 30, 2007, a decrease of $67,000 or 26%. This decrease was primarily
attributable to a decrease in recruiting cost of $68,000 and an increase in engineering
manufacturing and sales support, which decreased product development costs by approximately
$152,000, as personnel were redeployed from internal product development efforts to support
efforts. The decrease was partially offset by an increase in billable contract engineering, which
increased product development costs by approximately $46,000, an increase in personnel-related
costs of $55,000, an increase in outside consulting of $20,000 and a decrease in the recognition of
stock based compensation expense of $6,000 during the quarter ended June 28, 2008. There was also
an increase in materials utilized on internal product development projects of approximately
$13,000.
Product development costs are charged to billable engineering services, bid and proposal efforts or
product development. Engineering costs charged to billable projects are recorded as cost of sales
and engineering costs charged to bid and proposal efforts are recorded as selling expenses.
The Company actively sells its engineering services in support of funded research and development.
The receipt of these orders is sporadic, although such programs can span over several months. In
addition to these programs, the Company also invests in research and development to enhance its
existing products or to develop new products, as it deems appropriate. There was $400,000 of
billable engineering services revenue generated during the third quarter of fiscal 2008 and
$272,000 generated during the same period of fiscal 2007.
Net Income
The Companys net income was $186,000 for the third quarter of fiscal 2008, as compared to $109,000
for the same period of fiscal 2007. This 71% increase in income is primarily attributable to a 36%
increase in gross profit partially offset by a 28% increase in operating expenses. For the three
months ended June 28, 2008 the Company used available tax loss carryforwards against pre-tax income
of $186,000 such that there is no tax provision recognized in the income statement for the period.
The uncertainty of the timing of customer orders can result in periods with losses, sometimes
significant. This uncertainty will continue to make future results difficult to predict. Receiving
orders and contracts in a timely manner is essential to the Companys ability to sustain
operations.
Page 15
Nine Months ended June 28, 2008 as compared to Nine Months ended June 30, 2007
Net Sales
Net sales for the nine months ended June 28, 2008 were $5,648,000, as compared to $3,169,000 for
the nine months ended June 30, 2007, an increase of 78%. Sales for the first nine months of fiscal
2008 consisted of $5,260,000, or 93%, from domestic sources and $388,000, or 7%, from international
customers as compared to the same period in fiscal 2007, during which sales consisted of
$2,754,000, or 87%, from domestic sources and $415,000, or 13%, from international customers.
Foreign sales consisted of shipments to 11 different countries during the nine months ended June
28, 2008 and 14 different countries during the nine months ended June 30, 2007. A sale is
attributed to a foreign country based on the location of the contracting party. Domestic revenue
may include the sale of products shipped through domestic resellers or manufacturers to
international destinations. The table below summarizes our principal foreign sales by country
during the first nine months of 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Saudi Arabia |
|
$ |
94,000 |
|
|
$ |
5,000 |
|
United Kingdom |
|
|
89,000 |
|
|
|
|
|
Sri Lanka |
|
|
59,000 |
|
|
|
14,000 |
|
Thailand |
|
|
53,000 |
|
|
|
5,000 |
|
Colombia |
|
|
40,000 |
|
|
|
6,000 |
|
Lebanon |
|
|
36,000 |
|
|
|
|
|
Indonesia |
|
|
|
|
|
|
117,000 |
|
Sweden |
|
|
|
|
|
|
99,000 |
|
Bahrain |
|
|
|
|
|
|
71,000 |
|
Italy |
|
|
|
|
|
|
56,000 |
|
Other |
|
|
17,000 |
|
|
|
42,000 |
|
|
|
|
|
|
|
|
|
|
$ |
388,000 |
|
|
$ |
415,000 |
|
|
|
|
|
|
|
|
Revenue for the first nine months of fiscal 2008 was primarily derived from the sale of our
narrowband radio encryptors to a U. S. radio manufacturer amounting to $3,418,000. There were
additional sales of our narrowband radio encryptors to three (two domestic and one foreign)
customers amounting to $223,000. We also sold our data link encryptors to two domestic customers
amounting to $157,000. Foreign sales included a sale of our secure telephone, fax, and data
encryptors to the United Nations in Lebanon amounting to $36,000 and a sale of our frame relay and
internet protocol encryptor product line to two customers amounting to $183,000. In addition, we
had billings under a program with the U.S. government for engineering services work amounting to
$1,367,000.
Revenue for the first nine months of fiscal 2007 was primarily derived from the sale of our
narrowband radio encryptors to three U. S. customers amounting to $1,377,000, $308,000 and
$259,000, respectively, and a sale of our secure telephone, fax, and data encryptors to a customer
in Indonesia amounting to $120,000. Additional sales included an order from a customer in Bahrain
for our fax encryptors amounting to $71,000 and $99,000 worth of encryption equipment used in
missile testing systems to a customer in Sweden. We also generated $338,000 in revenue as a result
of a license agreement with a large domestic radio manufacturer. This customer also purchased
$119,000 worth of integrated circuit chips during the period. During the second quarter of fiscal
2007 we finalized a program with the U.S. government valued at $1.4 million for engineering
services work. This project generated $285,000 in revenue through the nine months ended June 30,
2007.
Page 16
Gross Profit
Gross profit for the first nine months of fiscal 2008 was $3,564,000 as compared to gross profit of
$2,252,000 for the same period of fiscal 2007, an increase of 58%. Gross profit expressed as a
percentage of sales was 63% for the first nine months of fiscal 2008 as compared to 71% for the
same period in fiscal 2007. The decrease in gross profit as a percentage of sales was primarily
associated with revenue generated from a license agreement with a domestic radio manufacturer in
the first nine months of fiscal 2007, which revenue did not recur during the same period in 2008.
Operating Costs and Expenses
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first nine months of fiscal 2008 were
$1,709,000, as compared to $1,267,000 for the same period in fiscal 2007. This increase of 35% was
primarily attributable to an increase in general and administrative expenses of $223,000 and an
increase in selling and marketing expenses of $219,000 during the first nine months of the 2008
fiscal year.
The increase in general and administrative costs during the first nine months of 2008 was primarily
attributable to an increase in personnel related costs of approximately $177,000 and an increase in
the recognition of stock based compensation expense of $44,000. There was also an increase in
recruiting fees of approximately $12,000 during the first nine months of the 2008 fiscal year.
The increase in selling and marketing costs was primarily attributable to an increase in third
party sales and marketing activities of $225,000 and an increase in new product evaluation
activities of $35,000, partially offset by a decrease in bid and proposal efforts of $43,000 as
compared to the same period in fiscal 2007.
Product Development Costs
Product development costs for the nine months ended June 28, 2008 were $779,000, compared to
$746,000 for the nine months ended June 30, 2007, an increase of $33,000 or 4%. This increase was
primarily attributable to an increase in personnel-related costs of $255,000 and an increase in
outside consulting costs of $69,000 during the nine months ended June 28, 2008. There was also an
increase in materials utilized on internal product development projects of approximately $32,000.
The increase was partially offset by a decrease in recruiting costs of $30,000. In addition there
was an increase in billable contract engineering and engineering efforts for bid and proposal and
new product evaluation, which decreased product development costs by approximately $178,000 and
$156,000, respectively, as personnel were redeployed from internal product development efforts to
support these other efforts.
Product development costs are charged to billable engineering services, bid and proposal efforts or
product development. Engineering costs charged to billable projects are recorded as cost of sales
and engineering costs charged to bid and proposal efforts are recorded as selling expenses.
The Company actively sells its engineering services in support of funded research and development.
The receipt of these orders is sporadic, although such programs can span over several months. In
addition to these programs, the Company also invests in research and development to enhance its
existing products or to develop new products, as it deems appropriate. There was $1,367,000 of
billable engineering services revenue generated during the first nine months of fiscal 2008 and
$285,000 during the same period of fiscal 2007.
Page 17
Net Income
The Companys net income was $1,148,000 for the first nine months of fiscal 2008, as compared to
$304,000 for the same period of fiscal 2007. This 278% increase in income is primarily attributable
to a 58% increase in gross profit partially offset by a 24% increase in operating expenses. For the
nine months ended June 28, 2008 the Company used available tax loss carryforwards against pre-tax
income of $1,148,000 such that there is no tax provision recognized in the income statement for the
period. The uncertainty of the timing of customer orders can result in periods with losses,
sometimes significant. This uncertainty will continue to make future results difficult to predict.
Receiving orders and contracts in a timely manner is essential to the Companys ability to sustain
operations.
The effects of inflation and changing costs have not had a significant impact on sales or earnings
in recent years. As of June 28, 2008, none of the Companys monetary assets or liabilities was
subject to foreign exchange risks. The Company usually includes an inflation factor in its pricing
when negotiating multi-year contracts with customers.
Liquidity and Capital Resources
Cash and cash equivalents increased by $1,428,000, or 55%, to $4,050,000 as of June 28, 2008, from
a balance of $2,622,000 at September 29, 2007. This increase was primarily attributable to cash
generated from net income of $1,148,000, proceeds from stock issuance of $283,000, a decrease in
inventory of $196,000 and stock based compensation of $126,000 during the period. This increase was
partially offset by an increase in additions to equipment and a decrease in accounts payable and
other accrued expenses of $116,000 and $246,000, respectively, during the first nine months of
fiscal 2008.
Our results during the first nine months of fiscal 2008 met our expectations. We were able to
secure several large orders for our radio encryption products which are being deployed in
Afghanistan by our customer, a domestic radio manufacturer. Approximately $3.5 million in orders
shipped to this customer during the first nine months of fiscal 2008. In fiscal 2007, we secured
two new programs for our engineering services work amounting to $2.4 million. During the third
quarter ended June 28, 2008 we received an amendment to one of these contracts adding an additional
$1.2 million in funding. These programs are billed monthly for time and materials incurred and are
expected to be completed in fiscal 2009. We billed $1,367,000 during the first nine months of 2008
under these programs. Previously we completed the development of a major upgrade program for our
customer in Egypt, which was important to the Company because it opened the door for future
hardware procurements of the upgraded product line. The results of this effort were realized in
April 2008 with the award of a contract from the U.S. Army, Communications and Electronics Command
(CECOM) for upgrades and supplies to be shipped to Egypt amounting to $5.75 million. This order is
expected to ship over the next 15 months.
Backlog at June 28, 2008 amounted to approximately $7.6 million. The orders in backlog are expected
to ship during fiscal 2008 and the first quarter of fiscal 2009, excluding the CECOM order
referenced above, which is expected to ship through the first quarter of fiscal 2010.
The Company has a line of credit agreement with Bank of America (the Bank) not to exceed the
principal amount of $600,000. The line is supported by a financing promissory note. The loan is a
demand loan with interest payable at the Banks prime rate plus 1% on all outstanding balances.
The loan is secured by all assets of the Company (excluding consumer goods) and requires the
Company to maintain its deposit accounts with the Bank, as well as comply with certain other
covenants. The Company believes this line of credit agreement provides it with an important
external source of liquidity, if necessary. There were no cash borrowings against the line during
the first nine months of fiscal 2008 or at any time during fiscal year 2007.
Page 18
Certain foreign customers require the Company to guarantee bid bonds and performance of products
sold. These guaranties typically take the form of standby letters of credit. Guaranties are
generally required in amounts of 5% to 10% of the purchase price and last in duration from three
months to one year. At June 28, 2008 and June 30, 2007 there were no outstanding standby letters
of credit. When necessary the Company secures its outstanding standby letters of credit with its
line of credit facility with the Bank.
In April 2007, the Company entered into a new lease for its current facilities. This lease is for
22,800 square feet located at 100 Domino Drive, Concord, MA. The Company has been a tenant in this
space since 1983. This is the Companys only facility and houses all manufacturing, research and
development, and corporate operations. The term of the lease is for five years through March 31,
2012 at an annual rate of $159,000. In addition the lease contains options to extend the lease for
two and one half years through September 30, 2014 and another two and one half years through March
31, 2017, at an annual rate of $171,000. Rent expense for the nine months ended June 28, 2008 and
June 30, 2007 was $119,000 and $114,000, respectively.
The Company does not anticipate any significant capital expenditures during the remainder of fiscal
2008.
During the remainder of fiscal 2008, the Company expects to maintain and possibly increase its
investment in internal product development. We expect that the products comprising the Secure
Wireless product line will continue to evolve and respond to new customer requirements. It is also
expected that CipherTalk Secure Voice encryption and CipherSMS Secure Text Messaging will be
applied to additional mobile platforms and that customer-specific features will be developed. TCC
will also continue its work evaluating new product options in the high-speed bulk encryption
markets for military applications. Depending on customer demand, TCC may also proceed with the
development of variants of its DSD72A-SP Military Bulk Encryptor, which would address higher speeds
and additional interfaces. On-going research and development in support of product improvements and
application variants also is expected to continue. Should the Company choose to embark on a major
development program in addition to its traditional research and development activities, engineering
staff will have to be added. The Company has sufficient physical resources to support the added
staff and believes that adequate technical resources exist in the Boston area to meet potential
needs; however we may need financial resources, in addition to cash from operations, to fund a
major new development program. The Company also may pursue small, targeted acquisitions of
strategic partners to expand its product line or customer base. This strategy will require
capital, and the Company may have to access the capital markets in the event its available
resources are insufficient to pursue such strategy.
Based on todays product cost structure and operating expenses, we believe that current cash and
accounts receivable balances along with the current backlog are sufficient to provide resources to
operate the Company through the end of fiscal year 2009. As a result of our profitability during
fiscal 2007 and the first nine months of fiscal 2008, the backlog at June 28, 2008 of $7.6 million,
including the contract award from the U.S. Army, we are optimistic about future sales growth and
other possible sources of financing, including private equity funding or future public stock
offerings. However, there is no assurance that any of these goals can be achieved. Due to the
uncertainty of the timing of customer orders, future results remain difficult to predict. Receiving
orders and contracts in a timely manner is essential to the Companys ability to sustain
operations.
Page 19
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Item 3. Controls and Procedures
Evaluation of disclosure controls and procedures. The Companys chief executive officer and chief
financial officer have reviewed and evaluated the effectiveness of the Companys disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period
covered by this quarterly report on Form 10-QSB. Based on that review and evaluation, the chief
executive officer and chief financial officer have concluded that the Companys current disclosure
controls and procedures, as designed and implemented, are effective to ensure that such officers
are provided with information relating to the Company required to be disclosed in the reports the
Company files or submits under the Exchange Act and that such information is recorded, processed,
summarized and reported within the specified time periods.
Changes in internal control over financial reporting. There were no changes in the Companys
internal control over financial reporting that occurred during the quarter ended June 28, 2008 that
have materially affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.
Page 20
PART II. Other Information
Item 1. Legal Proceedings
There were no legal proceedings pending against or involving the Company during the
period covered by this quarterly report.
Item 2. Unregistered Sales of Equity 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
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
|
|
|
|
|
|
10.1 |
|
|
Contract
with US Army CECOM Acquisitions Center dated April 18, 2008
(Confidential portions of this exhibit have been omitted and filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment.) |
|
|
|
|
|
|
31.1 |
|
|
Certification of principal executive officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
31.2 |
|
|
Certification of principal financial officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
32.1 |
|
|
Certifications of Chief Executive and Chief Financial Officers
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
Page 21
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
|
TECHNICAL COMMUNICATIONS CORPORATION |
|
|
|
|
|
|
|
|
|
(Registrant) |
|
|
|
|
|
|
|
|
|
|
|
August 11, 2008
Date
|
|
|
|
By:
|
|
/s/ Carl H. Guild, Jr.
Carl H. Guild, Jr., President and Chief
|
|
|
|
|
|
|
|
|
Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
August 11, 2008
Date
|
|
|
|
By:
|
|
/s/ Michael P. Malone
Michael P. Malone, Chief Financial Officer
|
|
|
Page 22
EXHIBIT INDEX
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
10.1 |
|
|
Contract with US Army CECOM Acquisitions Center dated April 18, 2008 (Confidential portions of this exhibit have been omitted and filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment.) |
|
|
|
|
|
|
31.1 |
|
|
Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
|
|
|
|
|
|
31.2 |
|
|
Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
|
|
|
|
|
|
32.1 |
|
|
Certifications of Chief Executive and Chief Financial Officers pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Page 23