SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the quarterly period ended March 31, 2001 or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the transition period to
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Commission File Number: 0-8588
TECHNICAL COMMUNICATIONS CORPORATION
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(Exact name of registrant as specified in its charter)
Massachusetts 04-2295040
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
100 Domino Drive, Concord, MA 01742-2892
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (978) 287-5100
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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
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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 May 11, 2001: 1,323,328.
INDEX
Page
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PART I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets,
as of March 31, 2001 (unaudited) and September 30, 2000 1
Condensed Consolidated Statements of Operations,
Three (3) months ended March 31, 2001 and April 1, 2000 (unaudited), 2
Condensed Consolidated Statements of Operations,
Six (6) months ended March 31, 2001 and April 1, 2000 (unaudited), 3
Condensed Consolidated Statements of Cash Flows,
Six (6) months ended March 31, 2001 and April 1, 2000 (unaudited), 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 7
PART II Other Information 10
Signatures 11
PART I. Financial Information - Item 1. Financial Statements
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 2001 September 30, 2000
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(unaudited)
Assets
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Current Assets:
Cash and cash equivalents $1,307,531 $3,121,617
Accounts receivable - trade, less
allowance for doubtful accounts
of $70,000 963,386 363,742
Inventories 3,379,173 3,452,403
Deferred income taxes 157,500 157,500
Other current assets 271,904 269,980
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Total current assets 6,079,494 7,365,242
Equipment and leasehold improvements 4,916,568 4,899,615
Less: accumulated depreciation and
amortization 4,460,534 4,330,749
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456,034 568,866
Goodwill 1,614,131 1,614,131
Less: accumulated amortization 1,253,717 1,146,262
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360,414 467,869
Other assets 740 740
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$6,896,682 $8,402,717
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities:
Accounts payable $ 260,686 $ 524,231
Accrued liabilities
Compensation and related expenses 234,220 162,420
Other 544,877 435,602
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Total current liabilities 1,039,783 1,122,253
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Commitments and contingencies
Stockholders' Equity:
Common stock, par value $.10 per share;
authorized 3,500,000 shares; issued
and outstanding 1,323,328 and
1,312,153 shares 132,333 131,215
Treasury stock at cost, 4,845 and
22,968 shares (38,284) (118,610)
Additional paid-in capital 1,365,600 1,341,742
Retained earnings 4,397,250 5,926,111
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Total stockholders' equity 5,856,899 7,280,458
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$6,896,682 $8,402,717
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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
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March 31, 2001 April 1, 2000
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Net sales $ 779,297 $1,381,050
Cost of sales 408,259 702,144
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Gross profit 371,038 678,906
Operating expenses:
Selling, general and
administrative expenses 936,184 1,102,528
Product development costs 329,603 266,972
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Total operating expenses 1,265,787 1,369,500
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Operating loss (894,749) (690,594)
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Other income (expense):
Interest income 18,641 82,063
Interest expense (537) (426)
Other 5,999 11,658
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Total other income (expense): 24,103 93,295
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Loss before income taxes (870,646) (597,299)
Provision (benefit) for income taxes - (179,190)
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Net loss $ (870,646) $ (418,109)
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Net loss per common share:
Basic $(0.66) $(0.32)
Diluted $(0.66) $(0.32)
Weighted average common shares outstanding
used in computation:
Basic 1,314,182 1,291,300
Diluted 1,314,182 1,291,300
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)
Six Months Ended
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March 31, 2001 April 1, 2000
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Net sales $ 2,100,214 $3,634,453
Cost of sales 831,811 1,512,480
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Gross profit 1,268,403 2,121,973
Operating expenses:
Selling, general and
administrative expenses 2,151,938 2,055,361
Product development costs 570,579 628,316
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Total operating expenses 2,722,517 2,683,677
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Operating income (loss) (1,454,114) (561,704)
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Other income (expense):
Interest income 54,484 105,141
Interest expense (1,069) (709)
Other (72,631) 12,382
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Total other income (expense): (19,216) 116,814
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Loss before income taxes (1,473,330) (444,890)
Provision (benefit) for income taxes - (133,467)
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Net loss $(1,473,330) $ (311,423)
=========== ==========
Net loss per common share:
Basic $(1.14) $(0.24)
Diluted $(1.14) $(0.24)
Weighted average common shares outstanding
used in computation:
Basic 1,297,876 1,284,950
Diluted 1,297,876 1,284,950
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Page 3
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
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March 31, 2001 April 1, 2000
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Operating Activities:
Net loss $(1,473,330) $ (311,423)
Adjustments to reconcile net loss to net
cash provided (used) by operating
activities:
Depreciation and amortization 261,625 421,935
Non-cash compensation 24,789 34,309
Gain on sale of investment - 117,121
Changes in assets and liabilities:
Accounts receivable (599,644) 1,375,255
Inventories 73,230 228,901
Other current assets ( 1,924) 225,431
Accounts payable and other accrued
liabilities ( 82,470) (432,410)
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Net cash provided (used) by operating
activities (1,797,724) 1,659,119
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Investing Activities:
Additions to equipment and leasehold
improvements (41,338) (131,346)
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Net cash used by investing activities (41,338) (131,346)
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Financing Activities:
Proceeds from stock issuance 24,976 37,633
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Net cash provided by financing
activities 24,976 37,633
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Net increase (decrease) in cash and
cash equivalents (1,814,086) 1,565,406
Cash and cash equivalents at beginning of
the period 3,121,617 2,338,935
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Cash and cash equivalents at the end of
the period $ 1,307,531 $3,904,341
=========== ==========
Supplemental Disclosures:
Interest paid $ 1,069 $ 142
Income taxes paid 3,256 -
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Page 4
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
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NOTE: THE DISCUSSIONS IN THIS FORM 10-Q, INCLUDING ANY DISCUSSION OF OR IMPACT,
EXPRESSED OR IMPLIED, ON TECHNICAL COMMUNICATIONS CORPORATION'S (THE COMPANY)
ANTICIPATED OPERATING RESULTS AND FUTURE EARNINGS, INCLUDING STATEMENTS ABOUT
THE COMPANY'S ABILITY TO ACHIEVE GROWTH AND PROFITABILITY, CONTAIN FORWARD-
LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF
1933, AS AMENDED. THE COMPANY'S OPERATING RESULTS MAY DIFFER SIGNIFICANTLY FROM
THE RESULTS INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S
OPERATING RESULTS MAY BE AFFECTED BY MANY FACTORS, INCLUDING BUT NOT LIMITED TO
FUTURE CHANGES IN EXPORT LAWS OR REGULATIONS, CHANGES IN TECHNOLOGY, THE EFFECT
OF FOREIGN POLITICAL UNREST, THE ABILITY TO HIRE, RETAIN AND MOTIVATE TECHNICAL,
MANAGEMENT AND SALES PERSONNEL, THE RISKS ASSOCIATED WITH THE TECHNICAL
FEASIBILITY AND MARKET ACCEPTANCE OF NEW PRODUCTS, CHANGES IN TELECOMMUNICATIONS
PROTOCOLS, AND THE EFFECTS OF CHANGING COSTS, EXCHANGE RATES AND INTEREST RATES.
THESE AND OTHER RISKS ARE DETAILED FROM TIME TO TIME IN THE COMPANY'S FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE FORM 10-K FOR THE
FISCAL YEAR ENDED SEPTEMBER 30, 2000, FORM 10-Q FOR THE QUARTER ENDED DECEMBER
30, 2000 AND THIS FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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STATEMENT OF FAIR PRESENTATION
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Interim Financial Statements. The accompanying unaudited condensed consolidated
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financial statements include all adjustments (consisting only of normal
recurring accruals), which are, in the opinion of management, necessary for fair
presentation of the results of operations for the periods presented. Interim
results are not necessarily indicative of the results to be expected for a full
year.
Certain disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted as allowed by Form 10-Q. The accompanying unaudited consolidated
financial statements should be read in conjunction with the Company's
consolidated financial statements for the year ending September 30, 2000 as
filed with the Securities and Exchange Commission on Form 10-K.
NOTE 1. Inventories
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Inventories consisted of the following:
March 31, 2001 September 30, 2000
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Finished Goods $ 534,648 $ 622,003
Work in Process 1,178,686 1,181,510
Raw Materials 1,665,839 1,648,890
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$3,379,173 $3,452,403
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Page 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
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NOTE 2. Line of Credit
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The Company has a $5 million asset-based credit facility with Coast Business
Credit ("Coast"). The line carries an interest rate of prime plus 1/2% (9.0% at
March 31, 2001). This revolving line of credit is collateralized by
substantially all the assets of the Company and requires no compensating
balances. There are financial covenants associated with the line, which call for
a minimum net tangible worth of $4,791,000 at March 31, 2001 and increasing over
time based on certain criteria and an interest coverage ratio requirement. The
amount of borrowings is limited to a percentage of certain accounts receivable
balances. At March 31, 2001 the Company was in violation with its interest
coverage covenant. Subsequently, Coast waived the default and modified the
interest coverage requirement for the future. The line matures in August 2003.
There were no outstanding borrowings during the quarter.
NOTE 3. Liquidity
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The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. However, as disclosed in the financial statements,
the Company had a net loss of $1,473,330 during the first six months of fiscal
2001, and the Company had significant losses in the prior two fiscal years.
Additionally, the Company's operations used significant cash during the first
six months of fiscal 2001. The recoverability of a major portion of the recorded
asset amounts shown in the accompanying balance sheet is dependent upon
continued operations of the Company, which in turn is dependent upon the
Company's ability to increase sales and to succeed in its future operations.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts and amounts and
classification of liabilities that might be necessary should the Company be
unable to continue.
Management has taken significant steps to streamline its operations and will
continue to do so as the situation warrants. These steps include reducing
headcount and eliminating infrastructure and other nonessential expenses and
capital expenditures. Management believes based on its understanding of the
marketplace that future sales will occur in a sufficient manner to allow the
Company to continue as a viable going concern.
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.
THREE MONTHS MARCH 31, 2001 AS COMPARED TO THE THREE MONTHS ENDED APRIL 1, 2000
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Net sales for the quarter ended March 31, 2001 and April 1, 2000, were $779,000
and $1,381,000, respectively. This decrease of 44% is attributed to variability
as a result of the timing of shipments and the receipt of anticipated orders.
Gross profit for the first quarter of fiscal 2001 was $371,000 as compared to
gross profit of $679,000 for the same period of fiscal 2000. This represented a
45% decrease in gross profit for the quarter. Gross profit expressed as a
percentage of sales remained relatively stable at 48% in 2001 as compared to 49%
for the same period in fiscal 2000. The overall decrease was the result of the
lower sales.
Selling, general and administrative expenses for the second quarter of fiscal
2001 and 2000 were $936,000 and 1,103,000, respectively. This decrease of 15%
was primarily attributable to $133,000 in costs associated with the settlement
of litigation during fiscal 2000 and a decrease in payroll, recruiting and
benefit related costs associated with a reduced headcount of approximately
$142,000. These decreases were partially offset by increased bidding and
proposal activity of $105,000 and a charge of approximately $40,000 associated
with a restructuring program and related workforce reductions.
Product development costs for the quarter ended March 31, 2001 were $330,000
compared to $267,000 for the same period in fiscal 2000. This increase of 24%
was primarily attributable to a shift away from billable product development in
fiscal 2001, which increased product development cost in fiscal 2001 by
approximately $160,000. There was a reduction in other departmental overhead
spending in the quarter that accounted for a decrease of approximately $100,000.
The decreases included training, recruiting, consultants, payroll and benefit
related costs associated with a slowdown in development related work.
The Company showed a net loss of $871,000 for the second quarter of fiscal 2001
as compared to a net loss of $418,000 for the same period in fiscal 2000. The
decrease in profitability is primarily attributable to the decrease in gross
profit and income tax benefit, which was partially offset by a decrease in
operating spending as described above. In addition, the Company earned $63,000
less interest income due to lower cash.
SIX MONTHS ENDED MARCH 31, 2001 AS COMPARED TO THE SIX MONTHS ENDED APRIL 1,
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2000
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Net sales for the six months ended March 31, 2001 and April 1, 2000, were
$2,100,000 and $3,634,000, respectively. This decrease of 42% is attributed to
variability as a result of the timing of shipments and the receipt of
anticipated orders.
Gross profit for the first six months of fiscal 2001 was $1,268,000 as compared
to gross profit of $2,122,000 for the same period of fiscal year 2000. This
represented a 40% decrease in gross profit for the period. Gross profit
expressed as a percentage of sales increased to 60% in 2001 from 58% as compared
to the same period in fiscal year 2000 due to a slightly better product mix.
Page 7
Selling, general and administrative expenses for the first six months of fiscal
2001 and 2000 were $2,152,000 and $2,055,000, respectively. This increase of 5%
was attributable to an increase in selling costs of approximately $288,000 and a
reduction in general & administrative costs of approximately $191,000.
The increase in selling costs was primarily attributable to increased third
party sales commissions and marketing contracts totaling $185,000, increased
bidding and proposal activity of $231,000 and marketing studies and research
amounting to $53,000. These increases were offset by a reduction in travel,
payroll, internal commissions and benefit related costs associated with the
lower sales volume, of approximately $166,000.
The decrease in general and administrative expenses were primarily attributable
to $144,000 in costs associated with the settlement of litigation during fiscal
2000 and a decrease in payroll, recruiting and benefit related costs associated
with a reduced headcount of approximately $92,000. These costs were partially
offset by a charge of approximately $40,000 associated with a restructuring
program and related workforce reductions.
Product development costs for the six months ended March 31, 2001 were $571,000
compared to $628,000 for the same period in fiscal 2000. This decrease of 9% was
attributable to an increase in engineering efforts to develop bids and proposals
of approximately $95,000, which is classified as a selling expense and decreases
in training, recruiting, payroll and benefit related costs associated with a
slowdown in development related work of approximately $165,000. These
reductions were offset by a shift away from billable product development in
fiscal 2001, which increased product development cost in fiscal 2001 by
approximately $267,000.
The Company showed a net loss of $1,473,000 for the first six months of fiscal
2001 as compared to a net loss of $311,000 for the same period in fiscal 2000.
The decrease in profitability is primarily attributable to the decrease in gross
profit and income tax benefit, as described above. The Company has recorded a
charge of approximately $75,000 for the discount associated with the non-
recourse sale of a long-term receivable in fiscal 2001. In addition, the Company
earned $51,000 less interest income due to lower cash balances.
Recent Accounting Pronouncement
--------------------------------
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB No.
101"), "Revenue Recognition in Financial Statements." SAB No. 101 provides
guidance on applying generally accepted accounting principles to revenue
recognition, presentation and disclosure in financial statements. Subsequently,
the SEC has amended the implementation dates so that the Company is required to
adopt the provisions of SAB No. 101 in the fourth quarter of 2001. Management
does not expect the adoption of this statement to have a material impact on its
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. In
June 1999, FASB issued Statement of Financial Accounting Standards No. 137 (SFAS
137), "Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement No. 133--an amendment of FASB Statement No.
133". This Statement has delayed the effective date of SFAS 133 until fiscal
years beginning after June 15, 2000. In June 2000, SFAS No. 133 was amended by
Statement of Financial Accounting Standards No. 138 (SFAS 138), "Accounting for
Derivative Instruments and Hedging Activities - an amendment of FASB Statement
No. 133. The Company has adopted this Statement during the first quarter of this
fiscal year. There was no material impact on the Company's financial position or
results of operations as a result of the adoption.
Page 8
Liquidity and Capital Resources
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Cash and cash equivalents decreased by $1,814,000 or 58% to $1,308,000 as of
March 31, 2001, from a balance of $3,122,000 at September 30, 2000. This
decrease was primarily due to a loss from operations and an increase of accounts
receivable. The current ratio decreased slightly to 5.9:1 at March 31, 2001
compared to 6.6:1 as of September 30, 2000.
The Company has a $5 million asset-based credit facility with Coast Business
Credit ("Coast"). The line carries an interest rate of prime plus 1/2% (9.0%
at March 31, 2001). This revolving line of credit is collateralized by
substantially all the assets of the Company and requires no compensating
balances. There are financial covenants associated with the line, which call for
a minimum net tangible worth of $4,791,000 at March 31, 2001 and increasing over
time based on certain criteria and an interest coverage ratio requirement. The
amount of borrowings is limited to a percentage of certain accounts receivable
balances. At March 31, 2001 the Company was in violation with its interest
coverage covenant. The bank subsequently waived the violation and the covenant
was amended going forward. The line matures in August 2003. There were no
outstanding borrowings during the quarter. Management believes this credit
facility will meet its current credit needs. Management anticipates no unusual
capital expenditures during the remainder of fiscal 2001.
The Company's revenues have historically included significant transactions with
foreign governments and other organizations. The Company expects this trend to
continue. The timing of these transactions has in the past and will in the
future impact the cash flow of the Company. Although the Company believes there
are currently sufficient cash and available funds under the line of credit to
meet its working capital needs, delays in the timing of significant transactions
may cause the Company to reevaluate and adjust its operations.
Page 9
PART II. Other Information
ITEM 1. LEGAL PROCEEDINGS:
There are no current matters pending.
Item 2. Changes in Securities and Use of Proceeds:
Not applicable.
Item 3. Defaults Upon Senior Securities:
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders:
The Annual Meeting of Stockholders of the Company was held on
February 12, 2001. The meeting was conducted for the purpose of
(i) electing one Class I Director, to serve for a term of three years
and (ii) ratifying the election of the Company's independent auditors.
The ratification of the election of the Class I Director was
approved with 1,145,244 votes in favor, 51,302 votes withheld.
The ratification of the Company's auditors was approved with
1,182,066 votes in favor, 11,500 votes against and 2,980 votes
abstaining.
Item 5. Other Information:
None.
Item 6. Exhibits and Reports on Form 8-K:
a. Exhibits:
10.5 Employment Agreement dated February 12, 2001 between the
Company and Michael P. Malone.
10.6 Employment Agreement dated February 12, 2001 between the
Company and John I. Gill.
b. Reports on Form 8-K:
None.
Page 10
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)
May 14, 2001 By: /s/ Carl H. Guild, Jr.
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Date Carl H. Guild, Jr., President and
Chief Executive Officer
May 14, 2001 By: /s/ Michael P. Malone
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Date Michael P. Malone, Chief Financial Officer
Page 11